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Cornell University Library
HG4651.R3
American and foreign 'nvestmen| bonds,
3 1924 013 899 509
Cornell University
Library
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AMERICAN AND FOREIGN
INVESTMENT BONDS
^
AMERICAN AND FOREIGN
INVESTMENT BONDS
BY
WILLIAM L. RAYMOND
BOSTON AND NEW YORK
HOUGHTON MIFFLIN COMPANY
R3
COPYRIGHT, 1916, BV WILLIAM L. RAYMOND
ALL RISHTS RBSERVSD
Published April iqib
(LI >70o
PREFACE
Tms book has been put together from talks given to the writer's
salesmen. The aim has been to discuss clearly and simply the
leading classes of investment bonds.
In trying to carry out this aim, the writer has confined himself
mostly to a discussion of the factors entering into the intrinsic
value of such securities. The material available is vast, compli-
cated, and always changing. At the same time the broad prin-
ciples which govern the safety of investment bonds are simple and,
like the laws of nature, forever the same.
From the point of view of the intrinsic value of American se-
curities, the Great War in Europe has brought into high relief the
resources and development of the United States. With the open-
ing of the Panama Canal, the creation of an adequate merchant
marine, and the establishment of a new banking system, this
country should be placed in a position with relation to the business
and finance of the world which it never has held before. Further-
more, the United States may become the market for a consider-
able amount of foreign govenmient securities. It is to-day, of
course, the principal market for the bonds of its own States, mu-
nicipalities, and corporations.
It is hoped that this book may suggest some pomts of view of
interest even to seasoned investors.
The writer wishes to thank Mr. Francis G. Goodale, who has
done a large part of the legal work — especially in Chapters HI,
IV, V, and VI. The writer wishes also to thank friends who have
read the manuscript.
W. L. R.
October 23, 1915.
CONTENTS
INTRODUCTION ix
I. THE FIELD OF INVESTMENT I
II. UNITED STATES AND FOREIGN GOVERNMENT BONDS 5
III. STATE BONDS 94
IV. COUNTY, MUNICIPAL, AND DISTRICT BONDS 140
V. STEAM-RAILROAD BONDS 1 62
VI. PUBLIC-SERVICE CORPORATION BONDS 1 98
VII. INDUSTRIAL BONDS 25 1
CONCLUSION 295
APPENDIX 297
INDEX 3"
INTRODUCTION
Investment in bonds is a comparatively modem development.
It has arisen out of the needs of governments and corporations to
finance themselves on a scale larger than that pos- ju^jstj^gnt -^
sible from annual taxes or annual earnings. Its devel- bonds is a
opment has been connected with the development modem
of banking. development
The banking business, in some form or other, has been carried
on practically continuously from a period six himdred years be-
fore the Christian era in Babylon ^ down through The banting
the periods of Athenian * and Roman * domination bee^SrHS on
of the civilized world, and again through the periods t™™o^^°*
of the rise and development of the Venetian and times
Florentine States, and the growth and commercial expansion of
such countries as modem England, France, Germany, and the
United States.
As early as the twelfth century, the Republic of Venice obtained
forced loans from its people. The State paid interest on these
loans, but deferred payment of the principal to a Early govem-
time "when the situation of affairs should permit me°t loans
it." * Later Venice obtained from its citizens loans secured by the
revenue from salt and by the income of the treasury for a certain
number of years. ^ Florence borrowed of its bankers and pledged
as security certain taxes and other revenues.®
Government borrowing, by the issue of bonds or other evi-
dences of debt, assimied a more or less regular form Government
in France in the time of Francis I^ (1515-47), in France, Eng-
England with the Revolution of 1688 and the Wars udteTsiSts
' The Bankers' Magazine, London, August, 1877, pp. 720-21.
' Macleod, The Theory and Practice of Banking (London, 1892), vol. I, p. 171.
' Ibid., p. 161.
* Dam, Histoire de la Ripublique de Venise (Paris, 1853), tome I, pp. 146-47.
* Ibid., p. 147.
* Perrens, Histoire de Florence (Paris, 1877), tome m, pp. 261-62.
' Vtihrer, Histoire de la Dette Publigue en France (Paris, 1886), tome i, p. 2.
X INTRODUCTION
of William m,^ and in what is now the United States during the
Revolutionary War.*
In the early part of the nineteenth century, we find in France
Eariy local Small amounts of local loans or debts of the com-
loans mimes ' and in the United States borrowing on a
considerable scale by our States and to a less extent by our cities.
In the United States, the bond business before and during the
Civil War was concerned principally with United States govem-
The bond mcnt, State, and to a less extent municipal bonds.
{•"si^inthe After that period, bankers became interested in
financing the building of many of our railroads and
during the past thirty years in furnishing money for the building
and development of gas, street-railway, electric-light, and tele-
This book will phonc properties. The financing of industrial con-
paflyof^ cems through the issue of bonds is a development
^fi^ld^"^ principally of the past twelve or fifteen years,
dasses of bonds Jq the following pages, we will concern ourselves
less with the history of borrowing than with the principles govern-
ing at present the intrinsic values of leading classes of bonds.
* Macleod, vol. i, pp. 441-48.
' TetM Census, voL vn, pp. 299-301.
' Hirst, The Credit of Nations (Washington, 1910), p. 96.
AMERICAN AND FOREIGN
INVESTMENT BONDS
AMERICAN AND FOREIGN
INVESTMENT BONDS
CHAPTER I
THE FflELD OF INVESTMENT
The investment of funds so as to have the principal safe and at the
same time obtain a reasonable income is an extremely difficult
matter. The field is so large, the possibilities of mis- „. . , ,
, ,. 1 Ml 1 The investment
take so numerous, that more than ordinary skill and of funds is
, , . , difficult
knowledge are required.
As a general rule, funds should be invested when received. K
investment is made when market prices are low as pm,ds gho^jj
well as when they are high, an average price will be be invested
paid and none of the funds will be left without re-
ceiving some income.
Funds may be placed in any one or more of the following prin-
cipal channels of investment: —
(i) Real estate and real-estate mortgages; Ji^lffnv'^t-
(2) Bonds; ment
(3) Stocks;
(4) Collateral loans, commercial paper, and ordinary notes of
firms and individuals.
About collateral loans, commercial paper, and ordinary notes,
we will say only a few words. This class of paper short-tenn
belongs not so much to the subject of investment as p^p"
to the subject of ordinary banking or loaning money for short
periods.
The other three principal kinds of investment — that is, in
real estate and real-estate mortgages, in bonds and The three
in stocks — may be said to furnish the ordinary SmTISInv^-
field for investment. ™^°*
The principal advantage that real estate has over other mediums
2 AMERICAN AND FOREIGN INVESTMENT BONDS
of investment is its tangibility. The great disadvantage which
. , , , real estate has is that it is difficult to sell quickly.
Advantages and
disadvanuges Another disadvantage is that the income is liable
to be imcertain and at times may cease altogether.
Real-estate mortgages are somewhat different. These run or-
dinarily from one to five years, — perhaps most commonly three
Real-estate yeais, — are tax exempt in many States, and are
mortgages written Usually for about sixty per cent of the as-
sessed value of the property. Such mortgages, when given by
responsible persons and after proper examinations, ought to be
reasonably safe mediums for investment. Even with mortgages
that are finally paid off, however, the payment of the interest often
is irregular.
There remain to be spoken of in this very general survey of the
Bonds and fi^ld of investment only bonds and stocks. For con-
stocks venience, we wiU speak of stocks first.
In a general way, stocks stand for the ownership of the business
and the right to receive the net profits, whereas real-estate mort-
Nature of gages or bonds stand for the prior claim on the prop-
stocks gj.^y a^Q^ ^Q right to obtain a stipulated amount in
interest before anything is paid in dividends to stockholders.
Stocks always are junior to bonds and notes of the same corpora-
tion. Often they represent to a large extent merely capitalization
of earning capacity. There is no promise to pay a definite sum of
money and no promise, as a rule, even to pay any income. The
stocks of any corporation have, in this respect, merely the right to
participate in earnings above operating expenses and fixed charges,
when, as, and if earned by the corporation and ordered distributed
by the board of directors.
Many corporations have two classes of stock, preferred and
common. Preferred stock usually is entitied to a certain dividend
Classes of before anything is paid on the common. Sometimes
stocks ^jjjg dividend is cumulative — that is, unless paid
regularly, it becomes an accumulated charge against earnings.
Many preferred stocks are preferred not only as to dividends, but
as to assets in case of liquidation.
^vKtmentjn The remaining important form of investment —
ject of this book investment in bonds — is the subject of this book.
THE FIELD OF INVESTMENT 3
The first thing to notice about bonds is that they represent, as
a rule, a promise to pay a definite sxim of money at Bonds imply a
a given time, with, usually, a regular rate of interest. ^^^^^ promise
The principal large classes of investment bonds are as follows : —
(i) Government bonds.
(2) State bonds. Principal classes
(3) County, municipal, and district bonds. bonds
(4) Steam-railroad bonds.
(5) Public-service corporation bonds, or bonds of corporations
suppl3dng water, gas, electric light and power, street-railway,
or telephone service.
(6) Industrial bonds or bonds of manufacturing and mercantile
It may be well here to speak of what may be called the frame-
work of bond investment. If we think of the bonds of the leading
civilized nations of the world; then of the bonds of our _ ,
The frame-
States and of our leading cities; then of the bonds of work of bond
the principal trunk-line railroads connecting those
cities; and then of the bonds of the street-railway, gas, electric-
light and power, and telephone companies serving those cities; and
then, if we add to those securities the bonds of the great industrial
concerns, we have the framework around which is built practi-
cally the entire structure of bond investment.
We cannot say that any one class of bonds is always and without
exception safer than another class, any more than we can say that
bonds are always safer than stocks or always safer one class of
than real estate. Each individual bond issue must be aiwaysTafer
judged on its own merits, yet with due reference to ''^*° another
the whole structure of investment, just as each case in common
' In view of the fact that we do not discuss in this book the methods of dealing in
or marketing bonds, we will say here that the two great markets in the United States
for all kinds of bonds are the New York Stock Exchange and private bankers or bond
dealers. Of the two markets, the latteris far and away the larger. The great bulk of the
state, municipal, and public-service corporation bonds is marketed by private bankers.
Original issues of steam-railroad and industrial bonds usually are sold first to clients
by private bankers. The New York Stock Exchange may be said to be the great
secondary market for railroad bonds and such other bonds as are listed there. All
the other stock exchanges in the country, including the Boston, Philadelphia, and
Chicago Exchanges, deal to a greater or less degree in bonds.
4 AMERICAN AND FOREIGN INVESTMENT BONDS
law must be judged on its own merits taken in connection with
the previously existing body of law,
wiUdiscusssafe- ^ *^^ following pages, we will take up in a general
ty of various way the features bearing on the safety of these vari-
kiDos of bonds ,.ip,,
ous kinds of bonds.
CHAPTER n
UNITED STATES AND FOREIGN GOVERNMENT BONDS
Government bonds either are simply promises to pay or ac-
knowledgments of indebtedness, or else are promises General de-
to pay and have some special security. In Europe, |ovSent
government bonds often are referred to as "stocks." ''°°<^=
The government bonds of most of the so-called great powers,,
notably the United States, Great Britain, France, and Germany,
are simply promises to pay or acknowledgments of ^^^^ ^^ ^j^^
indebtedness. In many cases these obligations have United states,,
no maturity, — as British consols, French 3% rentes, France, and
and German Imperial 3% bonds, — although often "^
reducible by purchase, as are aU old German Imperial bonds, by
drawings, as are French 3% redeemable rentes,^ or by redemption
at the option of the Government, as are British consols and Ger-
man Imperial bonds. ^ Government bonds of the class described-
above are payable, as a rule, out of the ordinary revenues and
resources of the Government, whether such revenues are derived
from customs duties, excise taxes, income taxes, or from any other
available resources.
In the cases of certain nations that do not have high credit,
there are often special provisions to secure the payment of interest
and principal of their government bonds: for instance, in the case
of the Japanese Govenament 4!% sterling loan, put Government
out at the time of the war with Russia, the bonds are time^^'ha^e^
secured by a charge on the annual net revenues of spedai security
the Imperial Japanese Govenmient Tobacco Monopoly; ' in the
case of the Argentine Republic Port of Buenos Aires 5% deben-
tures, the bonds, besides being a direct obhgation of the Ar-
gentine Government, are secured by a charge on the harbor
works and their revenues and on other property; * in the case of
' The Stock Exchange Official Intelligence for 1914 (London), p. 109.
» Ibid., pp. 3 and 109. ' Ibid., p. 113. * Ibid., p. 96.
6 AMERICAN AND FOREIGN INVESTMENT BONDS
the Bulgarian Government 6% state mortgage loan of 1892, the
bonds are secured by a first mortgage on certain state railways
and on the harbors of Varna and Burgas, together with the present
and future revenues and dues of those harbors; ^ in the case of the
Mexican 5% external consolidated gold loan of 1899, the bonds
are secured by special hypothecation of 62% of the import and
export duties of the United States of Mexico; ^ in the case of the
Greek Government 4% loan of 1902, the bonds are secured by a
prior lien on the surplus receipts from certain assigned revenues,'
by the surtax on tobacco deposited at the National Bank, and by
a first Men on certain railroad property and the share in its net
earnings accruing to the Government.*
Broadly speaking, however, government bonds are to be thought
of as representing simply the good faith and ability to pay of the
No legal rem- governments or nations issuing the bonds. There
dfifaufS^^' is no known method of collecting, against the wiU
nations Qf ^j^g nation indebted, a government bond issue or
the interest on it, except force. In the words of Professor Bas-
table, it rests with the Government " within its own discretion to
say whether or not it will meet its obligations." Again, he says,
"An Act of Parliament repudiating the national debt woxild be
quite as valid as any other measure."' Against a sovereign state,
the only remedy is what has been called "collection by warship."
Furthermore, a nation can borrow for any purpose that it
sees fit — from a strictly productive purpose, like construction
of railways, to a highly unproductive and wasteful
borrow for purpose such as war. It can and often does borrow
any purpose ^^^^ ^^ meet deficiencies in the revenue in times of
peace — in other words, it can borrow to meet running expenses.
Such a use of the borrowing power is far from desirable, but some-
times it is necessary. There is no authority that can place
restrictions on the purpose of borrowing or curb in any way a
sovereign state or nation.
* The Stock Exchange Official Intelligence for IQ14 (London), p. 100.
' Ibid., p. 114.
» Ibid., p. log. Revenues from the monopolies on salt, petroleum, matches, play-
ing-cards, cigarette paper, and Naxos emery, from tobacco dues, from certain stamp
dues, and from import duties collected by the custom-house at the Pirsus.
* Ibid., p. no. • C. F. Bastable, Public Finance (2d ed., London, 189s), p- 6ii-
UNITED STATES AISTD FOREIGN GOVERNMENT BONDS
PRICES OF GOVERNMENT BONDS, JAITOARY, 1913
Issue
Price
rield
about
(per
cent)
United States
Panama,! 3%,
due June i,
1961
102J and interest
2.92
This issue is not available to secure circula-
tion of national banks. Exempt from all
taxes national, state, and local.
British 2i%,
consols, cash'. .
TSAflat
333
Redeemable at option of Parliament on and
after April 5, 1923, at par. Interest Jan-
uary s, April s. July S. and October 5.
French 3% per-
petual rentes '. .
88^ flat
3-39
Interest January i, April i, July i, and
October i.
Italian 3i% rentes*
96 flat
3.6s
Interest January i and July I, exempt from
all Italian taxes present and future.
German Imperial
3%»
77|flat
391
Redeemable at option of German Empire,
after notice' to be fixed by law, at pai.
Interest April i and October i.
Austrian gold 4%
1876'
9i| flat
4-43
Interest April i and October i.
Hungarian 4%
gold rentes'. ...
87 flat
4.61
Redeemable at option of the Government at
any time. Interest January i and July i.
Principal and interest exempt from all
Hungarian taxes.
Russian 4%,
SeriesH'
9of flat
44S
Redeemable by drawings at par January i
and July i for repayment April i and Oc-
tober I within 81 years from 1890. In-
terest January i, April i, July 1, and Oc-
tober I. Exempt from all Russian taxes.
Russian s%, 1906'
104 flat
4.84
Redeemable by annual drawings at par on
and after February i, 1917, for repayment
on May i following. Must be repaid in
full by May i, 1956. Until May i, 1916,
loan caimot be converted or called for re-
payment. Interest May i and November
I. Exempt from all Russian taxes.
Japanese 4%
sterling, 1910,'
due June i,
1970
82 flat
4-9S
Redeemable at option of the Govenmient,
on six months notice, on or after June i,
1920, at par. Interest June i and Decem-
ber I. Interest exempt from Japanese
Income Tax.
Japanese 45%
sterling, 1905 »
(2d Series), due
July 10, 1925...
94§ flat
S.36
Redeemable at option of the Government
at any time, on six months notice, at par.
Interest January 10 and July 10. Inter-
est exempt from Japanese Income Tax.
« See Untied Slates Treasury Department, Circular 52, July i, 1912 (Washington, 1913), P- I7.
> The Stock Exchange Official Intelligence for 1914 (London), p. 3- • •fWi., p. 109. « Ibid,, p. iia.
• /6ii., p. 97. 'Ibid.iP. 111. '/ii/., p. 118. ' /6<a., p. 119. • /Wi., p. 113.
8 AMERICAN AND FOREIGN INVESTMENT BONDS
In view of this fact the question is, What is the real security, or
what are the factors that go to make up the ability and wiUing-
what is the ness of a Government to pay the interest and prin-
real security? ^^^-^ ^f J^g bonds?
If we approach this question first from the point of view of
what some of the leading government securities have been selling
Credit of the ^^^> — °^ from what may be called the point of view
leading na- of the Credit of the leading nations, — we shall be
tions as shown . , , ,,. , __
by the prices able to discuss it more mteUigently. The table on
mentTondr^' page 7 shows the prices and the approximate net
January, 1913 j^come basis ^ On which certain leading government
bond issues sold in January, 1913." We have chosen this date be-
cause it corresponds most closely with the date of reliable infor-
mation available in regard to the nations issuing the bonds. These
prices, as compared with those of 19 12, evidently show to a con-
siderable extent the effect of the events leading up to the Balkan
Wars and of the outbreak of those wars in the preceding autumn.
The income basis on which the above government bonds sell
reflects in a general way the credit of the nation issuing the obli-
gations. As may be seen from the table. United States Govern-
ment bonds sell to yield a smaller income, or, in other words, sell
at a higher price than the bonds of any other of the leading civil-
ized nations. British consols rank next, then French rentes, then
Italian rentes, and so on in the order of the list. What are the
reasons for these differences in price? In other words, why is the
credit of the United States or of Great Britain, for instance, higher
than that of Austria or Japan?
Before going any further it may be well to inqviire who and
^^ ^ what are the people responsible for these obligations,
people What is their origin? What briefly is their history?
fS^Me * What kind of people are they? What is their place
obligations? .^ ^^ ^^^j^p
' In the cases of issues having definite maturities, net income is determined by use
of the usual bond tables; in the cases of issues without definite maturity, net income
is determined by dividing the per-cent interest which the bonds pay by the per-cent
selling price. Flat quotations, or quotations including accrued interest, are reduced,
in figuring the yield, to an "and interest" basis. Quotations of all bonds except
United States Government bonds are in per-cent sterling.
' Prices of January 3, 1913. Price of United States bonds from Commercial and
Financial Chronicle (New York), vol. 96, p. 50. Prices of foreign government bonds
from the Statist (London), vol. 73, pp. S and 59.
UNITED STATES AND FOREIGN GOVERNMENT BONDS 9
Some of the nations issuing these obligations have their begin-
nings in a remote past. All are peopled to a greater or less degree
by a mixture of races, and all have occupied terri- Racial origin
tory with boundaries intermittently changing. In a modem^^"^
general way, with the exception of Japan and to a ^^°^^
less extent of Russia, all the great modem nations — the United
States, Great Britain, France, Germany, Austria-Hungary, and
Italy — come from a mixture in varying degrees of the Germanic
or Baltic tribes which overran the Roman Empire — 375 to 476
A.D. — with the Latin races of the Empire. The Slavs or Wends,
who at an early date appeared to be settled northeast of the Car-
pathians in the basins of the Vistula, Pripet, and upper Dniester,
were closely related in stock to the ancestors of the Baltic tribes,
Prussians, Lithuanians, and Letts. The Roman historian Pliny
speaks of Slavs along the Vistula and the Venedic Gulf — prob-
ably the Gulf of Danzig. The Goths and Huns at one time were
the conquerors of the Slavs. The Eastern Slavs became the Rus-
sian people. They attacked the Empire on the lower Danube
and reached the Don and the Volga.^ Later there took place an
amalgamation or absorption by the Slav race of a variety of
Ural-Altaic stocks, Turko-Tatars, Turko-Mongols, and various
Caucasian races.^ The origin of the Japanese is uncertain. The
aborigines were called Ainu — suggesting a close aflSnity with
Europeans. The bulk of the population to-day, however, seems
to be derived from a mixture of the Malay, Mongolian, and Man-
chu-Korean types — with the Malay element predominant. In
the course of many centuries, practically complete amalgamation
has taken place.' Apparently the islands were invaded from the
mainland of Asia. The earliest date of what is believed in Japan
to be authentic history is 660 B.C.*
The territorial and strategic position occupied by the so-called
great powers to-day is the result of centuries of change, usually
of countless wars, in all cases of generations of painful develop-
ment. Even now in the Great European War Europe is being
1 Encyclopedia Britannica (nth ed., 1911), vol. xxv, pp. 228-30.
2 Ibid., p. 873.
' Ibid., vol. XV, p. 165.
* Carl Ploetz, Epitome 0/ Ancient, MeduBvd and Modern History (12th ed., Boston),
P-33-
lO AMERICAN AND FOREIGN INVESTMENT BONDS
remade. Not only the territory, but the population, resources,
Chan • power, and prestige of the great nations of the world
leadership of are in the blast furnace. It has ever been so. This
great war, to be sure, appears to be one of the colos-
sal upheavals that occur only at long intervals; but civilization
like nature never stands stiU. The scepter has passed from Egypt
to Babylonia and Assyria, from Ass3Tia to Persia, from Persia to
Greece, from Greece to Rome; it has rested for a time with the
Venetian and Florentine Republics; it has passed to Spain, to
France, to England: it is passing now to the United States of
America — or so it would seem. All that is certain is that the
leadership of civilization and the relative rank of the nations of
the world vnR not remain forever the same.
If we glance at the history of the leading nations of to-day, we
shall be in a better position to understand their present status and
Development Credit. Everybody is familiar with the origin and
and rf'Se' development of the United States, and almost every-
United States body has a good idea of English history from Roman
times to the present. These are preeminently the nations which
have developed the individualistic ideal and have evolved through
patient struggle free institutions and constitutional government.
They have based their institutions on the common law;^ and they
have fought steadily for liberty, self-sufficiency, and equality
imder the law.
Modem France is a product of many forces and of many condi-
tions. After the great Frankish Empire of Charlemagne was di-
Outiineof vided through the Treaty of Verdun in 843 a.d.,
French there developed Germany from the East Frankish
portion and France from the West Frankish. The
people of the East Frankish kingdom were predominantly of
Germanic stock, those of the West Frankish were predominantiy
of Romance or Latin stock.^ Gradually there arose in France
the familiar struggle between the central authority or king
and the great nobles. At first the nobles were too strong for
the king, and the central authority developed late. This is
' See A. Lawrence Lowell, The Governments of Prance, Italy and Germany (Cam-
bridge, 1914), p. so, and note beginning on p. 65.
« Ploetz, p. 187.
UNITED STATES AND FOREIGN GOVERNMENT BONDS II
one of the striking differences between French and English
history.^ The struggle in France ended, however, in the almost
complete victory of the central authority under Louis XIV. In
that reign, what Buckle ^ has called "the protective spirit" ex-
tended to every phase of government and even to every phase of
intellectual activity. Individuality and the spirit of independence
were dead. The seeming unity, strength, and prosperity of France
under Louis XIV were seeming only. There followed, after a con-
siderable delay, to be sure, the fierce but purifying flames of the
French Revolution.' Then from democracy, rampant, xmrea-
soning, atheistical,* there had to be evolved again, slowly and
painfully, order and Hberty under law. Centralization remained
to a great degree, — perhaps greater than ever, — but it was a
centralization deriving its authority from the people instead of
from a hereditary king.* Now we have a chance to read the latest
chapter — the effort of republican France to regain something
of the power and prestige among the nations of the world that it
had before 1870 and to evolve a workable and stable system of
parliamentary government.
From the death of Charlemagne (814 A.D.) to the crowning of
William I of Prussia as German Emperor (1871), what is now
Germany has been most of the time broken up into „ ,,.
1 r 11 1 . 1 rm Outline of
a large number of small kingdoms or states. The German
Holy Roman Empire — which endured not only as ^°^
a name, but as an ideal for over a thousand years — imder Charle-
magne and under Otto I (936-73 a.d.) and his successors of the
Hohenstaufen line was a great reality — a powerful united Em-
pire.* Modern Germany — or Germany under the leadership of
Prussia — really derives from the old North mark, or the mark or
' Lowell, p. SI.
* Henry Thomas Buckle, History of CivilizaHon in England (New York, 1858),
vol. I, chap. XI.
' Ibid., chap. xn.
* The reason why the French Revolution attacked religion — why it set up the
"Goddess of Reason" — was that the prerevolutionary writers like Voltaire and
Rousseau attacked the abuses of the clergy even before they attacked the abuses of
the Government. Church and State were, moreover, closely intertwined. The clergy,
as in England before the Great Rebellion, stood on the side of the conservative —
the reactionary element. (Buckle, vol. I, chaps, xi and xn.)
» Lowell, p. 35.
* James Bryce, The Holy Roman Empire (New York, 1904), pp. 2x5-16, and 384.
12 AMERICAN AND FOREIGN INVESTMENT BONDS
boundary lying along both banks of the middle Elbe established
by the Germans against the Wends or Slavs; just as Austria de-
rives from the Bavarian Ostmark or East mark along the south
bank of the Danube east of the river Ems, founded about 800 A.D.*
In 1415, the German Emperor invested Frederick, Burgrave of
Nuremburg, a Hohenzollem, with the mark Brandenburg — ly-
ing east and west of the Elbe in the district about the old North
mark.^ From that time until the formation of United Germany
under William I, the only rulers who stand out conspicuously are:
Frederic WiUiam, the Great Elector of Brandenburg, who wrested
East Prussia from Poland * and carried out various internal re-
forms; Frederic William I, who established a formidable army,
left an overflowing treasury, and laid the foxmdation of the future
power of Prussia; * and Frederic 11, the Great (1740-86), who
added Silesia and PoUsh Prussia to his kingdom and revived the
political and intellectual life of Germany under the leadership of
Prussia.^ The successful war of Prussia and Austria against
Denmark, by which the victors obtained Schleswig, Holstein, and
Lauenburg (1864);^ the war of Prussia against Austria in 1866,
by which Prussia obtained Schleswig-Holstein, Hanover, and
other territory and established her supremacy over Austria in the
leadership of Germany; ^ and the Franco-Prussian War of 1870
resulted in the imification of Germany imder the leadership of
Prussia and the establishment of modem Germany as a great
power.
Italy like Germany, since the fall of the Western Empire (476
A.D.), has been torn and pieced together again and again. Odo-
OutUneof vakar (Odoacer), leader of German tribes, after the
itaUan faU of the Western Empire became ruler in Italy.*
Later the Ostrogoths under Theodoric conquered
Italy; and stiU later the Lombards conquered the country as far
south as the Tiber.' For a long period portions of Italy were
' Encyclopedia Britannica (1910), vol. m, p. 5, and vol. iv, p. 420. Ploetz, pp.
194-96. For map of the old marks, see F. W. Putzger's Historischer Schtd-AUas
(Bielefeld und Leipzig, 1895), p. 15.
' Ploetz, p. 252, and Putzger, pp. 18-19.
' Ploetz, p. 373, and Price ColUer, Germany and the Germans (New York, 1914),
P-3I-
♦ Ploetz, p. 397, and Collier, p. 33. » Collier, p. 36. « Ploetz, p. 506.
' Ibid., p. 510. ' Ibid., p. 173. • Ibid., pp. 174-75.
UNITED STATES AND FOREIGN GOVERNMENT BONDS I3
included in the old German Empire. Modem Italy dates from
the war of France and Sardinia against Austria (1859) and the
liberation of Italy from Austria.^ The outstanding figures of
this period are Count Cavour and Victor Emmanuel. In 1861
practically aU Italy, except Venice and the Papal territory, were
united under one scepter.^
The thrones of Austria and Hungary — which latter country
was inhabited as early as the ninth century a.d. by the Magyars,
a nomadic Fimiish tribe, which gradually had made its way from
the Ural region toward Europe ' — were occupied by the same
ruler, at intervals, as early as the fifteenth century. In 1687,
the hereditary succession to the throne of Hungary was conferred
on the male line of Austria; and by the Pragmatic Sanction was
allowed to pass, in case of necessity, to the female line. In accord-
ance with this settlement, Maria Theresa, archduchess of Austria,
ruled also as Queen of Bohemia and Hungary from 1740 to 1780.
Austria was the leader of the German Confederacy Austria-
formed toward the close of the Napoleonic wars and Hungary
later renewed or reestablished. On the abdication of his imcle in
1848, Francis Joseph I, the present Emperor, became Emperor
of Austria. The Hungarian Diet refused to recognize his acces-
sion, and an uprising of the Magyars against the House of Haps-
burg resulted in the practical independence of Hungary.* The
revolt finally was put down with the help of Russia. In 1867
the old constitution of Hungary — which had been abohshed by
Austria in 1849 — was restored; and Francis Joseph I, Emperor
of Austria, was crowned King of Hungary.^ The Dual Monarchy,
as it is called, probably contains the greatest diversity of races in
contiguous territory and imder one government of all the great
powers.
The history of modem Russia begins with Peter I, the Great
(1689-17 2 5). In the ninth century, bands of Swedes settled around
Novgorod, subjugated the Slavs and laid the foun- Q^y^^ .
dation of the future Empire of Russia.* For two Russian
hundred and fifty years, ending in 1480, Russia was "^ °^
' Ploetz, p. 502. * Ibid., p. 503. • Ibid., pp. 193-94 and 277.
* See Encychpadia BriUmnica (1910), vol. xm, p. 916.
« Ploetz, pp. 278, 372, 398, 400, 483, 49S, 498. Sio-"- ' I^H; P- 208.
14 AMERICAN AND FOREIGN INVESTMENT BONDS
in the hands of the Mongols. In the fourteenth centxuy, Moscow
became the national center of Russia.^ Toward the close of the
sixteenth century, Russians began to emigrate into Siberia and
within eighty years had reached the Amur and the Pacific.^ Peter
the Great, in his effort to Europeanize or modernize Russia,
founded the city of St. Petersburg (1703).' The reign of Catherine
n added much to the power and prestige of Russia. During her
reign there took place the three divisions of Poland (1772, 1793,
and 1795) which have been the cause of so much discord in Europe
since.^ Vast in territory, with a population of ovej one hundred
and seventy millions, Rxissia lacks and always has lacked one
thing — an ice-free port. For one hundred years she has set her
eyes on Constantinople, and is fighting for it in the present war.
Only one other of the great powers remains to be discussed —
Japan. We have spoken of the origin of the Japanese. At the be-
ginnin g of historic times, according to the Japanese
Japanese 66o B.C., the form of government in Japan was that
'^ of an empire imder a Mikado.^ In the seventh
century A.D., changes took place which resulted in the military
obtaining predominance over the dvil power, and the actual gov-
ernment passed from the Mikado into the hands of a usurping
military chieftain — later called the Shogun. The final outcome
of this system of dual government was a feudal system correspond-
ing in large measure to that of mediasval Europe.* After 1680,
the Shogun became a shadow and the great mass of feudal chiefs
likewise. The government really fell into the hands of the vassals.
This state of affairs, with its oppression, weakness, and anarchy,
lasted until 1868. The revolution which involved the fall of the
Shogimate and ultimately of feudalism, though essentially im-
perialistic in its prime purposes, may be called democratic with
regard to the personnel of those who planned and directed it.
There took place under the guidance of the nobles and the Samu-
rai a restoration of the administrative power to the Emperor.^
Japan in 1854 had been reopened to the Western world by the
' Ploetz, p. 277.
' Encyclopadia Britannica (nth ed.), vol. xxv, pp. 17-18.
* Ploetz, p. 395. ' Ibid., pp. 411, 413-14.
* Ibid., p. 33. • Ibid., pp. 212-13.
* Encydopadia Britannica (nth ed.), voL xv, pp. 264-65.
UNITED STATES AND FOREIGN GOVERNMENT BONDS 1 5
American naval officer Commodore Perry.^ She became one of
the great powers by defeating Russia in the war of 1904-05.
Later she established her rule over Korea and her dominance
over China.
Such described in a very brief way is the origin and develop-
ment of the great modem nations — the nations whose credit is
under special consideration in this chapter. In view Bearing of
of the fact that national obligations depend princi- devek^ent
pally for their payment on national good faith, we °° "^^^^
consider these historical facts of interest and of importance in
attempting to estimate national credit.
The credit of any nation at any given time may be said to be
determined by three leading considerations: —
(i) Its debt statement or the size of its debt compared with its
resources and with its population.
(2) Its debt history or its record of good or bad JoSS
faith '" estimating
national
(3) Its general standing with the other nations credit
of the civilized world.
Under the last heading come such considerations as the mili-
tary position of a nation, the form and stability of its govern-
ment, the character of its population and of its institutions, its
trade position and its general economic and financial status.
In order to understand the abnormal conditions affecting
credit created by the great war, it is first necessary j^^^^^i ^^^
to know the normal conditions or the conditions be- ditions vs.
, , , the war
fore the war.
Let us consider first what may be called the obvious or natural
reason for the credit of a nation or for the prices of its government
bonds; that is, the size of the debt compared with population
the estimated resources and with the population, wealth, and
The accompanying table (Table I) gives recent leading dviiized
estimates of population and wealth and recent figures "^ °^
of the debts of the United States, Great Britain and Ireland, Ger-
many, France, Russia, Austria-Hungary, Italy, and Japan.
It is very difficult to give figures of estimated resources suffi-
ciently accurate to be of great value in figuring percentage of debt
1 Ploetz, p. 563-
l6 AMERICAN AND FOREIGN INVESTMENT BONDS
to resources. At the same time it is desirable to try to form at least
some general idea of the proportion between wealth and debt.
Percentages, figured from estimates of wealth which differ so much
TABLE I
Country
Estimated
PopultUion'
Estimated WeaUh*
Debt
Weallh
per capita
Debt per
capita
ft.S
United States
Great Britain
and Ireland
95,411,000
45,663,000
66,146,000
39,660,000
167,920,000
50,237,000
35,026,000
52,312,000
$187,739,071,090 »
86,400,000,000 '
76,800,000,000 '
62,400,000,000 '
40,000,000,000 *
25,000,000,000 B
20,000,000,000 *
9,749,040,000 »
$1,026,686,026 "
3,479,070,854 "
4,869,674,212 u
6,343,622,400 M
4.538,654,400 "
3,812,798,400 "
2,578,435,200 1»
1,251,316,800 "
$1967.69
1892.12
il6r.07
1573-37
238.21
497.64
571.00
186.36
$ 10.76
76.19
73.62
159-95
27.03
75-90
73-6l
23-92
-55
4.03
6-34
10.17
11-35
I5-2S
12.89
12.84
Russia 2
Austria-Hungary. .
Italy .:..
The figures in this table are reduced to dollars on the basis of
Dollar = 4 shillings 2 pence English. Franc = 9.6 pence English.
Mark = 11.8 pence Engusfa. Yen = 2 shillings ^ pence Blnglish.
1 German Empire and States. * Exclusive of Finland.
« Statistical Abstract for the Principal and Other Foreign Countries in each Year from iqoi to 1912, no.
39 (London, 1914), PP- 12-13- Population of the United States estimated as of June i, 1912; of Great
Britain and Ireland, Germany and Italy, as of June 30, 1912; of France, Austria-Hungary, and Japan,
Z912; and of Russia, 1911.
* Figures for estimated wealth as given by different authorities vary greatly. For instance, the Paish
estimate for the United States in 1914 figures about $144,000,000,000, and the German estimate of
Helfferich for igii (Germany's Economic Progress and Natiorial Wealth, 1888-IQ13, by Dr. Karl Helf-
fericb, director of the Deutsche Bank [Germanistic Society of America, 1914], p. Z15) about $118,000,-
000,000; the Paish estimate for Great Britain and Ireland in 1914 comes to about $81,600,000,000; the
Helfferich estimate for Germany in 1911 amounts to about $70,800,000,000 (Helfferich, p. 113); the
Paish estimate for France in 1914 amounts to about $48,000,000,000 and the estimate of Th€ry in 1908,
$54,870,000,000 (see Helfferich, p. 114); the Economist estimate, by implication, for Russia and Austria-
Hungary in 1913 amounts in each case to about $43,200,000,000. The estimates given from the Commer-
cial and Financial Chronicle, for Russia, Austria-Hungary, and Italy, are given in the New Websterian Dic-
tionary (1912, p. 1039), as coming from the Bureau of Statistics, Department of Commerce and Labor,
but they do not so come. The original source of these estimates is unknown to the writer; but the esti-
mates are reasonable in view of earlier estimates of the wealth of the same coimtries.
B Estimate for 1912. Department of Commerce, Bureau of the Census, Estimated Valuation of Na-
tional Wealth, i8so-ZQi2 (Washington, 1915), p. 15.
8 Estimate for I9i3» Economist (London), vol. Lxxx, p. 51.
' Estimate for i9i3.^«wmM/, vol. ixxx, p. 51; andPaish estimate for 1914, 5/a/t5i (London), vol.
LXXX, p. 4x9.
8 Commercial and Financial Chronicle, vol. 100, p. 932.
« Encyclopcedia Britannica (nth ed.), vol. xv, p. 219. Estimated from Statistics for the Year 1004-05.
10 Principal of the public debt, July i, 1912, less net available cash in Treasury (except agency ac-
count), June 30, 1912. United States Treasury Department, Circular no. 52 (Washmgton, 1913), pp.
xg, 22.
" Aggregate gross liabilities March 31, 1912. Statistical Abstract for the United Kingdom in Each oj
the Last Fifteen Years from iSgg to igi^, no. 61 (London, 1914), p. 10.
» Total public debt of German Empire, year ending March 31, 1912. Total fxmded and floating pub-
he debts of 26 States January i to April i, 1912. (Figures for Bremen and Hamburg include munici-
pal debt.) Statistical Abstract for the Principal and Other Foreign Countries, no. 39 (London, 1914)
p. 437. Debt of Empire, $1,165,166,400; debt of States, $3,704,507,812.
"Total capital of the public debt Januaiy i, 1912, R6publigue Francaise, Minist^e du Travail et de
la Prevoyance Sociale. Statistique G^n^ral de la France, Annuaire StaUstique (Paris, 1913, statistics for
1912, Imprimerie Nationale), vol. xxxn, p. 133*.
" Total public debt of Russian Empire January i, 1912. Statistical Abstract for the Principal and Other
Foreign Countries (1014), p. 431.
" Total combineci Austrian and Hungarian public debts, 1912. Ibid., p. 450.
" Total " effective " public debt, year ending June 30, 1912, Ibid.t p. 445.
" Total public debt March 31, 1912. Ibid.^ p. 460.
UNITED STATES AND FOREIGN GOVERNMENT BONDS l^
in certain cases from other estimates, should be used only in con-
nection with other data in estimating the burden of the debt. This
table shows the United States by far in the lead of all other nations
in the amount of total wealth or resources. The wealth of Great
Britain and Ireland, while less than half that of the United States,
is shown to be larger than that of any other great nation — with
Germany a close third and France with a total wealth estimated at
$14,400,000,000 less than that of Germany. The table shows also
the United States with the smallest actual debt and very much the
smallest percentage of debt to resources. Figured on this percent-
age basis, the burden of debt is next lightest on Great Britain and
Ireland, then on Germany, then on France, then on Russia, then on
Japan, then on Italy, and heaviest of all on Austria-Hungary. In
the matter of per-capita wealth, the United States is not greatly
ahead of Great Britain and Ireland, but both these countries are
considerably ahead of France, very much ahead of Germany, and
in an entirely different class from all the other nations considered.
The debts figured on a per-capita basis show a very small debt for
the United States, moderate debts for Japan and Russia, large and
substantially equal debts for Italy, Germany, Austria-Hungary,
and Great Britain and Ireland, and an abnormally heavy debt for
France.
In estimating the burden of debt it is a matter of considerable
importance to know what proportion of the debt represents income-
producing property, such as railways, and what pro- Assets off-
portion may be called non-productive or dead-weight someixteut
debt. It is also important to know whether any other "atio°ai debts
assets exist which properly may be considered as an offset to at
least a part of the debt. For instance: from the debt of the United
States in 1912, in estimating its true burden, we may fairly deduct
$134,631,980 of Panama Canal bonds ;^ from the debt of Great
Britain and Ireland we may fairly deduct estimated market value
of Suez Canal shares, $211,420,800, and other assets, $17,781,053,
or a total of $229,201,853; ^ from the combined debt of the German
Empire and the twenty-six German States we may properly deduct
$4,077,387,590 as the estimated cost of construction on a mileage
* U.S. Treasury Department, Circular 52, p- i7-
' Statistical Abstract for The United Kingdom, no. 61 (London, 1914)1 p. 10.
1 8 AMERICAN AND FOREIGN INVESTMENT BONDS
basis of the government-owned railways; ^ from the debt of France
we should not only deduct the value of the state railways actually
owned, say, $821,548,997, but should take into consideration the
fact that between 1950 and 1958 practically aU the railways of
France, valued in 1911 at $3,701,184,000, after amortizing them-
selves win become the property of the Government;^ from the debt
of Russia we may deduct $1,557,633,600 incurred on account of
railways; ^ from the debt of Austria-Hungary we may deduct, say,
$2,079,198,749 as the value of the 22,034 miles of state railways,*
and also from the debt of Italy we should deduct, say, $1,131,300-
000 as the cost of construction of the Italian state railways; ^ and
from the debt of Japan we should deduct, say, $290,534,400 as the
value of state-owned railways.^ In deducting the value of railways
from national debts, it should be noted that there is a great differ-
ence in the revenue-producing powers of the state railways in
different countries: for instance, the railways of Prussia-Hesse
in Germany are operated with such success financially as to be a
source of considerable net income to the State above the charges
on their capital; the railways of Japan also have been a financial
success; those of Russia, on the other hand, have been up to date so
unprofitable as to compel as a whole a large annual contribution
from the State for their support.'' The government-owned railways
of Italy have failed by a good deal to earn the interest on their
capital; and those of Austria-Hungary usually have earned less
than the interest on their debt.* The French lines are beginning to
show a measure of prosperity.^ It is impossible to make statements
^ Statistical Abstract for the Principal and Other Foreign Countries, no. 39 (London,
1914), pp. 387, 407. As a further set-off against the debt of the German Empire, there
existed in 191 2 a variety of invested funds as well as the war treasure at Spandau of
about $28,320,000; and as a further set-off against the debts of many of the twenty-
six German States, there existed a variety of funds and income-producing property
other than railways. Statesman's Year-Book, igi^ (London, 1913), pp. 869, 900-50.
* Statistical Abstract for Foreign Countries, pp. 390, 407. Samuel O. Dunn, Govern-
ment Ownership of Railways (New York and London, 19x5), p. 22.
' Statistical Abstract for Foreign Countries, p. 431.
* lUd., pp. 396-97, 408. Dunn, p. 382.
' Figures for 1910, Dunn, p. 30. Italy has various other income-produdng property
including the Cavour Canals. Statesman's Year-Book (1913), p. 990.
* Statistical Abstract for Foreign Countries, p. 404.
' Dunn, p. 317.
* Ibid., pp. 313-16.
* Ibid., p. 316.
UNITED STATES AND FOREIGN GOVERNMENT BONDS I9
absolutely definite about such matters as these; but it is perhaps
fair to say that, taking into consideration the value of income-
producing property, the debt of Germany in 191 2 was less of a bur-
den on the resources and population of the country than that of
any other nation except the United States, and that the debt of
Great Britain and Ireland was probably the largest dead-weight
debt — with the possible exception of Russia — of any country in
the world, but was not by any means the most burdensome on the
resources and population of the country.
There is another way in which we may estimate the burden of
debt — that is, by comparing the annual debt charge with the
estimated national income or earnings of the people Debt charge
and with the annual government expenditure. Table ^^^^ ™"'
II shows estimated national income, annual debt income
charge and percentage of debt charge to national income, wherever
recent reliable data can be obtained, of the countries under special
consideration in this chapter.
This table, omitting Italy and Japan from consideration, shows
the burden to be by far the lightest in the case of the United States
and the heaviest in the case of France. In connection with this
table, as with the previous one, there should be borne in mind the
income-producing powers of the various state railways and other
productive works. T^ u. i.
^ Debt charge
Table III shows total government revenue and compared
expenditure, debt charge and percentage of debt govermnent
charge to total expenditure for the same countries. '^^^ ""'*
This table shows the percentage of debt charge to government
expenditure to be much the smallest in the case of the United
States and the largest in the case of France — with Japan a close
second.
In the three tables referred to we have applied various tests to
the debt statements of the leading civilized nations in an effort to
estimate from this point of view their credit. It may „ , .
1 » n 1 !• t trrowth in
be of interest to trace bneny the growth m popula- population,
tion, wealth, and income and the increase in debts of income, and
the great nations of the world. It must be remem- ^^^^
bered that almost all figures of this kind, even figures of debts, are
approximations. It is perhaps not unfair to say that hardly any
20 AMERICAN AND FOREIGN INVESTMENT BONDS
two authorities agree on the amount of a nation's debt at any
given time.
As giving us some standard to appreciate from what small be-
ginnings the great nations of to-day have developed, we would say
Growth in ^^^ ^^ population of theRomau Empire at the death
^pufation of of Augustus, 14 B.c.,has been estimated at 54,000,000,
dviiized divided as follows: Europe, 23,000,000; Asia, 19,500,-
°°* 000; Africa, 11,500,000.^ The popxUation of the
TABLE n
Country
United States
Great Britain and Ireland
Germany
France
Russia
Austria-Hungary
Italy
Japan
EstimaUd na-
tifnud income^
$33.600,000,000 1
10,800,000,000 '
10,080,000,000 *
6,000,000,000 *
7,200,000,000 •
4,320,000,000 <
National
debt charge *
$22,616,000 7
117,600,000 "
2i5»o6s,o54 8
244,358,400 •
199,428.156 "
162,286,000"
86,606,400 «
72,134^70"
National in-
come fer
capUa
$352.16
236.52
152.39
iSi-29
42.88
85.99
National
debt charge
per capita
% .24
2.58
3-25
6.z6
i.ig
3-23
2.47
1.38
Percentage
oSdM
charge to
income
.07
1.09
2.13
4.07
2.77
3-76
Dollar = 4 shillings 2 jy ncp English.
Mark =11.8 pence English.
Franc «= 9.6 pence English.
Austrian krone and Hungarian korona ■
Russian rouble = 2 shillings ij pence En§;
Japanese yen = 2 shillings \ pence T
I English-
^ Estimate of Sir George Paish in 1Q14 in the Statist, voL Lxxx, p. 419.
* Estimate for r9i3. Economist (London), vol. lxxx, p. 51.
3 This is by implication the Economist estimate for 1913 (voL lxxx, p. 51). The total national income
for the Unit&i Kingdom, France, and Russia is given as the equivalent of $24,000,000,000 with definite
figures for the United Kingdom and France.
* Economist estimate by implication for 1913 (voL LXXX, p. 51).
fi These estimates, tike those for national wealth, should be used with f
at care. As compared with
the national income of Great Britain and Ireland as given in the table, Bir George Paish {Statist, voL
LXXX, p. 419) estimates this in 19x4 at about $11,520,000,000; the Paish estimate for Germany made at
the same time is about $9,600,000,000 and for France about $5,760,000,000 (Ibid.); the estimate of Helf-
ferich for Germany in 191 1 was about $9,440,000,000 (Germany's Economic Progress, p, 99) and of Stein-
man Bucher in 1908 (see Webb, New Dictionary of Statistics [1911], p. 630), about $8,400,000,000; and
the estimate of A. de Lavergne and Paul Henry for France about 1907 (Webb ligiz]. P- 630) was from
about $4,320,000,000 to about $5,280,000,000. The most recent estimate of the national income of Italy
which we have found is that made by Mulhall, in 1888, about $1,747,200^000 (Molhall, Dictionary oj
Statistics [London, 1899], p. 322). So mr as we know, there is no reliable estimate of the national income
of Japan.
* Unless otherwise stated, this is the total public debt charge for the calendar year 1912.
7 Interest on the public debt for the year ending June 30, 1912. Statistical Abstract for the Principal
and Other Foreign Countries, No. 39 (London, 1914), p. 456.
3 Total public debt expenditure of the German Empire and States, year beginning April i, 1912. 5/3-
tistisches JahrbuchfUr das Deutsche Reich, issued by Statistischen Amte igij (Berlin), p. 346. (Interest
for 1912, $176,967,668.)
' Total annual debt expenditure, 1912 (total interest paid $146,073,600), R£pubUque Francaise, Min-
ist&-e du Travail et de la Prevoyance Sodale. Staiistique Genirale de la France, Annuaire Statistique
(Paris, 1913. Imprimerie Nationale) vol. xxxn, p. 133*.
^3 PubUc debt services, Russian Empire, 1912 (interest for 19x1. $188,688,743). Statistical Ahsiracf *or
Foreign Countries (1914), p. 431.
" Statistical Abstract for Foreign Countries (19x4), pp. 447i 440.
" Interest on "effective" debt, year ending June 30, 1912. Statistical Abstract for Foreign Countries
(1914). P- 445-
u National debt consolidation fund, year ending March 31, 1912. Stattsttcal Abstract for Foreign
Countries (X914), p. 459.
" National debt services for year ending March 31, 1912, Statistical Abstract for the United Kingdom,
no. 61 (London, i9i4)> P- 5- (Interest <A funded debt for 1912, $73,972,969-60.)
* Estimated by Bodio (Mulhall, Dictionary (^Statistics [London, 1899], p. 441).
UNITED STATES AND FOREIGN GOVERNMENT BONDS 21
United Kingdom has been estimated at early dates as follows: 1066,
3,500,000; 1381, 3,860,000; 1528, 5,676,000. The population of
France in 1328 has been estimated at 10,000,000.^ The population
of all Europe before the fifteenth century hardly exceeded 50,000,-
000.* The following table * shows estimates of the population of
what are now the leading countries of Europe at intervals of one
TABLE m
Country
Total
govemmmt
revenue^
Total
government
expenditure •
Govern-
ment
revenue
per capita
Govern-
ment
expendi-
ture fer
capita
National debt
charge "
Debt
charge
per
capita
1"«£
United States
Great Britain
and Ireland
Germany
France
Russia
Austria-
Hungary.. .
Italy
$ 992,249,000 '
888,433,373 •
681,129,600*
886,185,600 «
1,586,784,000 •
1,025,635,200 '
549,105,600 s
322,024,080*
$965,274,000 s
857,016,480 '
681,129,600 *
926,308,800 e
1,606,670,400 ■>
1.039.526,400 '
549,105,600 8
286,833,930 •
$10.40
ig.46
10.30
22.34
9- 45
20.42
15. 68
6.16
$10.12
18.77
10.30
23.36
957
20.69
15.68
S.48
$ 22,616,000"
117,600,000 *8
55,815,888 «
244,358,400 "
199,428,156 "
162,286,000 "
86,606,400 "
72,134,370 "
$.24
't
6.16
1. 19
3.23
2.47
1.38
2.34
13.72
26:38
12.41
15.61
Japan
2S-IS
Dollar = 4 shillings 2 pence English.
" pence English
Mark
Franc
9.6 pence English.
Austrian krone and Hungarian korona = 10 pence English.
Russian rouble = 2 shilhngs x^ pence English.
Japanese yea = 2 shillings \ pence English.
' Total government revenue and expenditure, unless otherwise stated, given for calendar year 1912.
" Year ending June 30, igi2. Statistical Abstract for Foreign Countries (London, 1914), pp. 455-56.
" Year ending March 31, 1912. Statistical Abstract for the Umted Kingdom, no. 61 (London, 1914), p. z.
* Budget estimate of German Empire only, year beginning April i, 1912. Statistical Abstract for For-
eign Countries (London, 19x4), p. 436.
s Budget estimate of 1912. StatisUcal Abstract for Foreign Countries (London, X914), pp. 440-4X.
" Statistical Abstract for Foreign Countries , 1914, pp. 430-31.
7 Total combined revenue and expenditures of Austria and Hungary, X912. Statistical Abstract for
Foreign Countries (London, 1914), pp. 446-47, 448-49.
^ Budget estimate for year ending Jime 30, 1912. Statistical Abstract for Foreign Countries (London,
1914). p. 444-
* Budget estimate for total revenue and expenditure lor year endiiig March 31, 1912. Statistical
Abstract for Foreign Countries (London, 1914), pp. 458-59.
10 Unless otherwise stated, this is the total pxibUc debt charge for the calendar year X012.
11 Interest on the public debt for the year ending June 30, 19x3. Statistical Abstract for the Principal
and Other Foreign Countries, no. 39 (London, 1914), p. 457.
13 Public debt charge, German Empire only, year beginning April i, igi2. Statistical Abstract for
Foreign Countries (London, 1914.)* P- 436.
13 Total annual debt expenditure, igj2 (total interest paid, $146,073,600), R6publique Fran^ise,
Minist^e du Travail et de ui Prgvoyance Sociale, StatisUque Gin£rale ae la France, Annuaire Statistiqtte
(Paris, 1913), Imprimerie Nationale, vol. xxxn, p. 133*.
^* Public debt services, Russian Empire, 1912 (interest for 1911, $188,688,743). Statistical Abstract
for Foreign Countries (London, 1914), p. 431.
" Statistical Abstract for Foreign Countries (London, 1914)1 PP- 447. 440'
1* Interest on "effective" debt, 1912. Statistical Abstract for Foreign Countries (London, X9T4), p. 445.
" National debt consolidation fund. Statistical Abstract for Foreign Countries (London, 1914), p. 459.
13 National debt services for year ending March 31, 1912. Statistical Abstract for the United Kingdom,
no. 61 (London, 1914), p. $. (Interest of funded debt for 19x2, $72,972,969.60-)
' Mulhall (1899), pp. 444-45-
2 Estimated by Bodio (Mulhall [1899], p. 441).
' Mulhall, p. 441. In the table, England at present stands for the United Kingdom
of Great Britain and Ireland, Prussia for the German Empire and Austria for Austria-
Hungary. The 1912 figures are from table on p. 16.
22 AMERICAN AND FOREIGN INVESTMENT BONDS
hundred years from 1480 to 1880 inclusive, and the estimated
population in 1912.
POPULATION
1480
isSo
16S0
1780
1880
zei2
England. . .
France
Prussia. . . .
Knssia
Austria
Italy
3,700,000
12,600,000
800,000
2,100,000
9,500,000
9,200,000
4,600,000
14,300,000
1,000,000
4,300,000
16,500,000
10,400,000
5,532,000
18,800,000
Z,400,000
12,600,000
14,000,000
11,500,000
9,561,000
25,100,000
5,460,000
36,800,000
30,200,000
12,800,000
35,004,000
37,400,000
45,260,000
84,440,000
37,830,000
28,910,000
45,663,000
39,660,000
66,146,000
167,920,000
50,237,000
35,026,000
This table shows France greater in population than any of the
other countries of Europe as far back as 1480 — twelve years
before the discovery of America; it shows Austria in the lead in
1580, France second, and Italy third. It shows France, Austria,
Russia, and Italy all having a greater population than England in
1680. It shows after the eighteenth century a great relative gain
for Great Britain and Ireland as compared with France and a very
large gain for Germany and Russia. The population of the Ameri-
can colonies and of the United States at various dates has been
as follows: ^
1673 160,000
1701 297,000
1750 1,161,000
177s 2,803,000
1790 3,930,000
1810 7,240,000
1830 12,866,000
i860 31,443,000
1880 50,156,000
1912 95,411,000
This table shows the growth in popidation of the American na-
tion from little more than bands of colonists to nimibers larger than
those of any of the coimtries of Europe except Russia. The accom-
panying table (p. 23) ^ shows the population of the United States,
Great Britain and Ireland, France, Germany, Austria-Hungary,
Russia, Italy, and Japan for 1890, 1900, and 1912.
• Estimates apparently of Mulhall until 1790, then census figures. Mulhall (1899),
p. 4SO. The 1912 figures are from table on page 16.
» Mulhall (1899), pp. 442, 450. Encydopadia Britannica (11th ed., 1911), vol. 19,
p. 269. Table, p. 16.
UNITED STATES AND FOREIGN GOVERNMENT BONDS 23
United States
Great Britain and Ireland
France
Germany
Austria-Hungary
Russia
Italy
j8go
62,481,000
38,200,000
38,800,000
48,600,000
40,100,000
92,000,000
30,300,000
igoo
76,303,387
40,909,925
38,517,975
56,345,000
45,089,531
129,211,113
32449,754
43,759,577
igi2
95,411,000
45,663,000
39,660,000
66,146,000
50,237,000
167,920,000
35,026,000
52,312,000
This table is remarkable chiefly as showing the great growth in
population of Russia, the United States, and Germany and the
practically stationary condition of population in France. The pop-
ulation of all Europe in 1778 has been estimated at 150,000,000,^
in 1882 at 327,800,000,* and in 1912 at 450,000,000.' The popula-
tion of the world in 1804 has been estimated at 640,000,000,^ in
1883 at 1,433,000,000,^ and about 1912 at 1,732,000,000.^
The growth in wealth has been even more remarkable. The
following figures ^ for the wealth of England and Wales or of the
United Kingdom at different dates may be of interest: *
Da
te Country
Estimated wealth
Authority
1660
England and Wales
$1,200,000,000
Petty
170^
England and Wales
2,352,000,000
Davenant
176s
Great Britain
5,280,000,000
Mulhall
1812
United Kingdom
10,512,000,000
Colquhoun
1816
United Kingdom
11,520,000,000
Mulhall
18^^
United Kingdom
18,000,000,000
Pablo Pebrer
j86o
United Kingdom
26,688,000,000
Mulhall
1865
United Kingdom
29,342,400,000
Giffen
1870
United Kingdom
33,984,000,000
Mulhall
1885
United Kingdom
48,177,600,000
Gifien
i8q8
United Kingdom
56,688,800,000
MulhaU
1913
United Kingdom
86400,000,000
Economist
' Estimated by Moheau (Mulhall [1899], p. 441).
» Estimate of Behm-Wagner (Mulhall [1899], p. 441).
' World Almanac (1915), p. 62.
* Estimate of Malte-Brun (Mulhall [1899], p. 44i)-
» Estimate of Behm-Wagner (Mulhall [1899], p. 411).
' World Almanac (1915), p. 62.
' Reduced at the rate of $4.80 to the pound sterling.
8 Mulhall (1899), pp. 589, 700, and (1903), p. 262. Webb, The New Diclionory oj
Statistics (London, 1911), p. 629. Table, p. 16.
24 AMERICAN AND FOREIGN INVESTMENT BONDS
Growth in wealth The Wealth ' of France at different dates has been
of the leading ^. ^ j r n t
nations estimated as follows: ■*
Date
Estimated wealth
Authority
1780
$7,296,000,000
8,640,000,000
13,564,800,000
20,928,000,000
23,232,000,000
33,600,000,000
41,088,000,000
46,512,000,000
62,400,000,000
La Voisier
1815
Chaptal
Flaix
182^
i860
Guyot
Guyot
1865
1871
i88<
Guyot
Mulhall
1808
TOT2
Estimated figures for the wealth of the United States at different
dates are as follows: '
Date
Estimated wealth
Dale
Estimated wealth
$619,200,000
1,065,600,000
1,497.600,000
1,680,000,000 *
1,881,600,000
2,649,600,000
3.753,600,000
1850
i860
1870
1880
1890
1900
1912
$7,135,780,228
16,159,616,068
24,054,814,806
43,642,000,000
65.037,091,197
88,517,306,775
187,739,071.090
1800
1810
1814
1820
iS-jo
• Estimate of Sir George Faish {Statist, vol. Lxxx, p. 419).
Comparisons of early with recent estimates of the wealth of cer-
tain of the other coimtries under consideration are: Aggregate of
the German States in 1814 probably less than that of France, or
say less than $9,600,000,000 compared with $76,800,000,000 in
1913-14; * Italy, in 1868, about $9,283,200,000, and in 1884, from
$10,272,000,000 to $11,712,000,000 (Pantaleoni), compared with
say $20,000,000,000 in 1912; and Austria-Himgary, in 1880, about
' Reduced at the rate of $4.80 to the pound sterling.
' Mulhall (1899), pp. 591-92, 700. Table, p. 16.
' Figures from 1790 to 1840, inclusive, except those of Sir George Paish, from
Mulhall (1899), p. 593. Figures from 1850 to 1912, inclusive, from Department of
Commerce (Bureau of the Census, Estimated Valuation of National Wealth 1850-
IQ12 [Washington, 1915], vol. i, pp. 20-21, 24-25). — Census figures are not always
comparative. The figures for 1850, i860, and 1870 are exclusive of exempt real es-
tate. Figures for 1870 are on a gold basis.
* Sir George Paish, Statist, vol. lxxx, p. 419, and table, p. 16.
UNITED STATES AND FOREIGN GOVERNMENT BONDS 2$
$18,240,000,000 (Beer), compared with say $25,000,000,000 in
1912.^ The following table ^ shows estimates by Mulhall of the
wealth of the United States and of the leading nations of Europe in
1888 and 1898 compared with estimates from the table on p. 16
for 191 2-13: —
1888*
1898^
1912-1 3t
United States
Great Britain and Ireland . .
France
Germany
Russia
Austria-Hungary
Italy
$61,536,000,000
51,840,000,000
42,720,000,000
36,000,000,000
27,840,000,000
20,160,000,000
13,920,000,000
$78,480,000,000
56,668,800,000
46,512,000,000
38,649,600,000
30,840,000,000
21,657,600,000
15,168,000,000
$i87,739,07r,090
86,400,000,000
62,400,000,000
76,800,000,000
40,000,000,000
25,000,000,000
20,000,000,000
* Michael G. Mulhall, Dictionary of Statistics (4th ed., London, zSgg), p, 589.
t Mulhall (1899), p. 700. t Table, p. 16.
Certain recent estimates * of the wealth ' of the United States,
Great Britain and Ireland, the British Empire, Germany, and
France may be grouped as follows: —
United States.
Great Britain and Ireland .
British Empire
Germany
France
1903
1904
191 2
1903
190S
1913
1903
1902
1908
1908
1913
1908
1908
1913
(Giffen)
(Census)
(Census) '
(Giffen)
(L. G. Chiozza Money)
(Economist)
(Giffen)
(Schmoller)
(Balled)
(Steinman Bucher)
(Economist)
(Lavergne
& Henry)
(Th6ry)
(Economist)
$86,400,000,000
107,104,192,410
187,739.071,090
72,000,000,000
54,720,000,000
86,400,000,000
106,800,000,000
48,000,000,000
60,240,000,000
76,800,000,000
76,800,000,000
43,200,000,000
(Private wealth
only)
54,870,000,000
62,400,000,000
1 Mulhall (1899), p. 592, and table, p. 16.
' Reduced at the rate of $4.80 to the pound sterling.
• Webb, New Dictionary of Statistics (1911), pp. 629-30, and Department of Com-
merce, Estimated Valttation of National Wealth (Wasldngton, 1915)1 p. 15, and table,
p. 16.
26 AMERICAN AND FOREIGN INVESTMENT BONDS
From the time of the close of the Napoleonic wars until the dates
of the most recent estimates, the wealth of France has increased
between six and seven-fold; that of Great Britain and Ireland, over
seven-fold; that of Germany, about eight-fold; and that of the
United States, nearly one himdred and twelve-fold.^ These figures
are startling and explain in great measure the ease with which
Europe has borne the debts inherited from the Napoleonic wars
or created in the one himdred years since, and the ease with which
the United States paid off its Civil War debt.
The development of the national income, or what is sometimes
called the total earnings of the people, has been no less remarkable
than that of wealth. The national income of the
national United States has increased from less than $480,000,-
"""""^ 000 in 1814 to about $33,600,000,000 in 1914; that
of the United Kingdom has iucreased from about $1,440,000,000 in
1814 to about $11,520,000,000 in 1914; that of France from, say,
$1,200,000,000 in 1814 to about $5,760,000,000 in 1914; and that of
Germany from a figure probably less than that of France in 18 14
to about $9,600,000,000 in 1914.^
The increase of national debts has been very great but very
irregular. As wiU be shown later, large increases in debt usually
took place for the purposes of war. The table on
national page 27 shows approximate figures for national debts
at selected dates from 1713 to 1912 inclusive. These
dates, with the exceptions of 1889 and 191 2, are those of important
historical events; namely, 1713, the Treaty of Utrecht which
ended the War of the Spanish Succession; 1763, the Peace of Paris
ending the Seven Years' War; 1793, the beginning of the Reign of
Terror in France; 1816, the end of the Napoleonic wars; 1848, the
year of Revolution in Europe; and 1870, the outbreak of the
Franco-Prussian War.
In 1889, Spanish America, according to Mulhall, had debts
amounting to about $1,598,400,000; India had a debt of about
* Comparisons are made on the basb of Sir George Paish's figures for 1814 and the
figures in table on p. i6.
* Estimates of Sir George Paish in the Stalist, vol. Lxxx, p. 419. These estimates
may be compared with those of the Economist, vol. ixxx, pp. 50-51. For estimates
of national income of various countries at different dates, see Webb, New Dictionary
of Statistics (1911), pp. 629-30, and Mulhall (1899), pp. 320-22 and p. 747.
UNITED STATES AND FOREIGN GOVERNMENT BONDS 2/
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28 AMERICAN AND FOREIGN INVESTMENT BONDS
$892,800,000; Turkey, about $864,000,000; Australia, about
$826,800,000; Portugal, about $542,400,000; and Egypt, about
$494,400,000. As Mulhall remarks, the debts of the world increased
from 1793 to 1889 — a period of ninety -six years — just about
tenfold.^ The origin of these debts or the purposes for which they
were created has been given by Mulhall " as follows: —
Armaments $17,328,000,000
Railways and telegraphs 6,960,000,000
Roads and bridges 3,744,000,000
Smidries 772,800,000
Total $28,804,800,000
There is, it is to be noticed, a discrepancy between the total
amounts of this table and the one on the preceding page, but un-
doubtedly the second table tells in a general way for what pur-
poses the money borrowed was expended. Figures are not available
showing the purposes for which debts were created up to 191 2 ; but
probably they would show somewhat the same proportion between
debts for the various purposes. The debt increase by periods has
been somewhat as follows: —
DEBT INCREASE OF WORLD FROM 1713 (TREATY OF
UTRECHT) »
Period
Increase
Per annum
$787,200,000
1,569,600,000
4,987,200,000
417,600,000
10,272,000,000
10,771)200,000
12432,000,000
$15,840,000
';2, ^20,000
216,960,000
t8t7-i8a8
12,960,000
4,67,04.0,000
566,880,000
540,i;2I,7M
$41,236,800,000
$207,220,100
1 Dudley Baxter has called attention to the fact that the laige debt of Holland in
the eighteenth century compared with her resources led to the loss of her commerce
and political power. National Debts (1871), pp. 42 and 95-96.
« Mulhall (1899), p. 260.
• Hid. Mulhall's figures for the increase by periods are given in millions of
pounds only. The figures, therefore, are merely approximate. See also our table
" PubUc Debt."
UNITED STATES AND FOREIGN GOVERNMENT BONDS 29
As Baxter remarks, — treating of a period subsequent to the
Napoleonic Wars, which so greatly increased the debt of Great
Britain, — the rate of increase in debts was very different before
and after i860. Up to i860 national borrowing was chiefly in
Europe. The revolutions of 1848, the Crimean War of 1854, and
the French-Austrian War of 1859 caused most of the increases in
debts. After i860 there was the American Civil War, the Prussian-
Austrian War of 1866, and the Franco-Prussian War of 1870.
Immense loans were made in America and in Europe. There took
place what might be called an epidemic of borrowing. The average
annual total loans were about as foUows: 1848-54, $96,000,000 a
year; 1855-60, $240,000,000 a year; 1861-73, $960,000,000 a year; ^
1874-1912, $500,900,000 a year. It is to be remembered that a con-
siderable portion of the debts in the later periods were for produc-
tive purposes such as railroads. The public debts of the countries
under special consideration in this chapter in 1900, at the end of a
long period of peace, compared with the debts in 191 2, were sub-
stantially as foUows:
PUBLIC DEBTS IN 19002 AND 1912
Total dat
Debt
per capita
igoo
Total debt
Debt
per capita
United States.. ..
Onited Kingdom .
France
German Empire. .
Prussia
Austria
Hungary
Russia
Italy
Japan
$1,402,638,073
3,019,098,154
5,193,834,520
569,062,987
1,582,003,200
1,720,502,400
886,080,000
3,148,800,000
2,812,800,000
253,934.400
$18.12
73.80
135-36
10.10
45. 00
66.46
46.56
24.48
86.40
5.80
$1,026,686,026
$ 10.76
3,479,070,854
76.19
6,343.622,400
15995
1,165.166,400
17.63
2,225,214,264*
55.40'
2,494,228,800
86.02
1,318,569,600
62.08
4,538,654.400
27.03
2,578,435.200
73.61
1,251,316,800
23.92
* Population December i, 1910 {Statistical Abstract Jot Foreign Countries^ p. 8). Debt Z912 (StatisfiS'
ches Jahrbuch [Berlin, 1913], p. 34fi)-
These figures show fairly recent changes in the debts of the vari-
ous countries under special consideration.
The debt charges have not always varied in direct proportion to
the size of the debts themselves. This is owing prin- changes in
cipally to a change in the rate of interest. There have ^^^^ charges
> Journal of the Royal Statistical Society, March, 1874, pp. 2-3.
' Encyclopcedia Britannica (nth ed., 1911), vol. xix, p. 269.
30 AMERICAN AND FOREIGN INVESTMENT BONDS
been many conversions, especially in English and American debt
history and some forced reductions in interest, as in the cases of
France in early times, Austria, and other coimtries. We will take
up this question when dealing with the debt histories of the sepa-
rate countries.
We have outlined the relations between the population, re-
sources, and debts of the leading civilized nations of the world.
We will take up now their debt history or record of
good or bad faith. When it is remembered that there
is no legal method of collecting a national debt or the interest on
it against the will of the nation indebted, the importance of a
nation's record becomes apparent.
Of the nations under special consideration, the debt history
which goes back the farthest is that of France. Although there are
records of earlier royal borrowings, the foundation of
the French national debt was laid early in the fif-
teenth century.^ Later Francis I (1515-47) obtained various sums
through the city of Paris, which kept a list of the creditors and
distributed the interest.^ Part of this money he borrowed for his
ransom. An extensive revision of the debt was carried out by Sully
in 1604. Other attempts were made by Mazarin and Colbert.'
Throughout French debt history, owing partly to the various
forced reductions and conversions, particularly in early days, and
partly owing to lack of clearness in the records, the facts are very
difficult to establish. Viihrer has described the history of the vari-
ous French loans previous to the nineteenth century as " a history
of bankruptcies." * All forms of loans were tried and all possible
methods of evasion were used to escape payment. There were
forced reductions and debasements of the ciurency. To costly
wars and internal disturbances was added ignorance of financial
and economic conditions.
Louis XrV spent great sums in war and in building Versailles.
In. this reign, the interest on the debt was reduced to 4%.^ At the
' Encyclopedia Britannica (nth ed., 1910), vol. x, p. 794.
' C. F. Bastable, Public Finance (1895), p. 576.
' Encyclopaedia Britannica (nth ed., 1910), vol. x, p. 794, and Bastable, Public
Finance (London, 1895), p. 596. * Viihrer, vol. i, p. 220.
' Leone Levi, Journal of the Royal StaHstical Society (London, 1862), vol. xxv,
p. 322; Mulhall (1899), p. 264.
UNITED STATES AND FOREIGN INVESTMENT BONDS 3 1
death of Louis XIV, in 1715, the capital of the debt amounted to
about $595,200,000. This was arbitrarily reduced by the Regent in
1716 to about $384,000,000.^ The debt increased with John Law's
State Bank and through his schemes for the creation of paper
money. In 1 72 1 , by a series of measures both violent and arbitrary,
the debt was reduced by half. In 1764, the Comptroller-General
de Laverdy "so reduced the capital of the debt as to cause a new
bankruptcy." ^ After this reduction, the debt amounted to $460,-
200,000 and the annual charge to $18,135,000.* In 1784, a sinking
fund was established, but soon after was suppressed.
During the convention and revolutionary periods, "the famous
assignats and all kinds of government papers were issued of fabu-
lous amounts and utterly worthless." ^ The public debt was consoli-
dated in August, 1793. The use of paper money and forced loans,
however, destroyed any benefit that might have been obtained.^
In 1798, Napoleon introduced a proper system of finances, but did
not recognize the debt incurred during the Revolution. AU per-
petual and life annuities, old and new, were changed for two thirds
of the amount into notes called dette publique mobilisie — exchange-
able for land — and one third was entered in the Grand-Livre
under the title of Hers consolidi. The two thirds exchangeable only
for land soon lost all value and the one third became the origin of
the present national debt of France.* After some reductions for
confiscations, the balance in annual interest was ascertained to be
about $7,680,000, representing a capital debt of about $153,600,-
000. As illustrating French credit at this time, a price of seven
francs per cent for the 5% rentes is interesting.^ The financial
administration of Napoleon I had two great merits — (i) it refused
to issue inconvertible paper money, and (2) it refused to meet war
expenditure to any large extent by borrowing.^ It made up the
deficiency by levying contributions on other nations. The debt at
the close of the First Empire, including floating debt of about
$96,000,000, amounted to, say, $339,096,000.*
» R. Dudley Baxter, National Debts (London, 1871), p. 49.
' Levi, vol. XXV, p. 322. ' Bastable (1895), p. 597.
* Levi, vol. XXV, p. 322. ' Bastable (1895), p. 597.
' Levi, vol. XXV, p. 322. See also loth Census of the United States, vol. vn, p. 269.
Bastable (1895), p. 597.
' Annuaire Statistiqtte (1912), p. 74*. ' Bastable (1895), pp. 597-98'
» Baxter, National Debts (1871), p. 50.
32 AMERICAN AND FOREIGN INVESTMENT BONDS
The Government of the Restoration was obliged (i) to meet the
war indemnity levied on France by the Allies; (2) to compensate
the Emigres or dispossessed proprietors; and (3) to take up the bal-
ance of the imperial outlay or deficits. These problems were
handled with honesty and firmness. The Government refused to
repudiate. To meet these expenditures, the Government between
1815 and 1830 made a net increase in interest on the debt of about
$19,200,000, representing a net capital increase of about $432,000,-
000.^ It was in 1825 that the 3% rentes were created.* The French
debt in 1830 is given by Baxter as amounting to about $680,-
496,000.'
The Orleanist Government began its career by borrowing. It
created loans to clear off deficits, to prepare for war, and to carry
out public works. During this period, however, the redemption of
the debt was carried on. These were years of profoimd peace, dur-
ing which the public credit stood high.* The debt in February,
1848, according to Baxter, amounted to about $873,600,000.^ The
price of the 5% rentes in 1844 reached 126.30.®
The Second Republic added about $10,176,000 to the interest
charge, and brought the total charge up to nearly $44,160,000 a
year. This was a time of hazardous experiments on the part of the
provisional government and of complete disorganization of the
financial system.^ During this period, there were forced "con-
versions" or arbitrary reductions of interest.* By loans, consolida-
tions, and an indemnity for the emancipation of slaves, the Second
Republic raised the capital of the debt to about $1,177,200,000.'
In 1848, both the 5% and the 3% rentes sold at the lowest prices
since the close of the Napoleonic wars. The 5% rentes were quoted
at 50 and the 3% rentes at 32^.'°
Under Napoleon HI, even from the time of his presidency,
"debts were accumulated as never previously." The apparent
1 Bastable (1895), pp. 598-99. Baxter (1871), p. 51.
' Annuaire Statistique (191 2), p. 74*.
' Baxter (1871), p. 51. (In all Baxter's figures of the French debt after 1798, the
s inkin g fund is excluded, but the caution money and floating debt are included.)
* Bastable (1895), p. 599. » Baxter (1871), p. 51.
' Annuaire Statistique (1912), p. 74*. ' Bastable (189s), p. 599.
" Francis W. Hirst, The Credit of Nations (National Monetary Commisaon,
Washington, 1910), p. 84.
9 Baxter (1871), p. 51. w Annuaire Statistique (1912), p. 74*.
UNITED STATES AND FOREIGN GOVERNMENT BONDS 33
decrease between 1866 and 1868 was fictitious — caused by manip-
ulating the accounts.^ Through continued deficits and the Cri-
mean, Italian, and other wars, France again heavily increased its
debt." The total cost of the Crimean War to France was about
$316,800,000, of which about $295,200,000 was added to the debt.
Further loans were issued much under par for the Italian War and
the Mexican Expedition. The total addition to the debt between
1852 and July, 1870, was represented by an interest charge of about
$24,768,000. The total annual payment had risen to about
$69,120,000 and the capital to a little less than $2,304,000,000.
The Franco-Prussian War was as marked in French debt history
as the war with Napoleon I in the case of the English debt. In
addition to the expenses of carr3dng on the war, there was an in-
demnity of about $960,000,000. The total expense of the war has
been estimated at about $1,886,400,000, of which about $1,632,-
000,000 was raised through loans.' As showing the effect of the
Franco-Prussian War on the credit of France, it is interesting to
note that the 3% rentes sold in 1870 at a high price of 75.10 and
in 1871 at a low price of 50.35.*
After the war, there were fresh loans for public works and to
meet budget deficits. There had been in 1862 a conversion of the
debt which had reduced the interest, but had increased the capital
by about $307,200,000. There were also conversions in 1883 and
1894.=
The French debt in 191 2 was the largest in the world and nearly
twice that of Great Britain and Ireland. The "faUing-in" of the
railway property, referred to earlier in this chapter, will lessen
considerably the burden of the debt. Baxter in 1871 estimated the
French debt charge,* compared with the national income for differ-
ent periods, as follows: 1818, 3.5%; 1837, 2.3%; 1870 (before the
Franco-Prussian War), 2.3%; after the war, about 5%.^ These
percentages compare with our figure of 4.07% ia 1912.
' Tenth Census, vol. vn, p. 270. ' Baxter (1871), p. 51.
' Bastable (1895), p. 600. * Annuaire StatisHque (1912), p. 75*.
' Bastable (1895), pp. 600-01. There was a successful conversion in 1852 by wMch
a large amount of $ P^r cents were converted into 4^% stock with a considerable
saving in interest to the State. (Hirst, Credit of Nations, p. 93.)
' The French debt charge for 1870 includes railway guarantees and the bridge and
canal fund. (Baxter [1871], p. S3.)
' Baxter (187 1), pp. SS-S7-
34 AMERICAN AND FOREIGN INVESTMENT BONDS
After France, the debt history of England or of the United
Kingdom is older than that of any other country under special
consideration. In 1672, the Exchequer was closed by
rea n in (^]ja^j.jgg jj^ ^nd about $6,376,924, which had been
advanced on the credit of supplies voted by the House of Com-
mons, was seized. Later this so-called "bankers" debt was con-
solidated with other debts and interest paid at the rate of t%}
The British debt began in earnest after the Revolution of 1688
and with the wars of William III against France." The principal of
the debt at the time of the Revolution has been given as about
$3,188,462.' The first loan raised by WiUiam III was for four years,
with interest partly at 7% and partly at 8%, and was a charge on
certain excise duties.* The debt at the Peace of Ryswick (1697),
exclusive of annuities, amounted to about $103,275,562. During
the five years of peace which succeeded, nearly one quarter of the
debt was paid off.*
In 171 1, there was established the celebrated South Sea Com*
pany, which has a curious connection with the history of the
English debt. This company was formed to assist the Government
in its financial operations. On government obligations amounting
to about $43,200,000, httle or no interest had been paid. The secu-
rities were greatly depreciated. The South Sea Company was em-
powered to receive these obligations as subscriptions for its stock.
The amount of the stock thus created was about $44,054,246,
which in 1715 was increased to about $48,000,000 by the addi-
tion of certain arrears of interest.* The wars of Marlborough
under Queen Anne raised the debt at the time of the Peace of
Utrecht, in 17 13, exclusive of interest and annuities, to about
$250,297,742.' During this reign, the system of raising money by
' Robert Hamilton, An Inquiry concerning The Rise, Progress, Redemption, Present
State, and Management, of the National Debt of Great Britain and Ireland (3d ed., en-
larged, Edinburgh, 18 18). (In Samuel Jones Loyd, Select Collection of Scarce and
Valuable Tracts and Other Publications on the National Debt and The Sinking Fund,
[London, 1857], p. 474.)
' Baxter (1871), pp. 7-8.
' Hamilton, p. 499.
« Ibid., p. 475-
' Ibid., p. 499.
' Ibid., p. 478, and Fenn's Compendium of the English and Foreign Funds (gth
ed., London, 1867), p. 2.
1 Hamilton, p. 500.
UNITED STATES AND FOREIGN GOVERNMENT BONDS 35
mortgaging particular branches of the revenue was continued.
Large amounts also were raised by annuities and by means of lot-
teries. The debt created was considerably larger than the amount
of money received.^
The reign of George I marked an important recovery of national
credit, owing to the conditions of peace and to economy. In 17 16,
there was established the first sinking fund, usually called after Sir
Robert Walpole. In 1717, after negotiations with the Bank of Eng-
land and the South Sea Company, a general reduction in interest
on the public debt to 5% was agreed upon. Ten years later, in
1727, the Government arranged to reduce from 5% to 4% the
interest on its debt to the Bank and to the South Sea Company;
and in 1732, the Government made a similar arrangement with the
East India Company. The irredeemable annuities also were con-
verted into redeemable debt, and a reduction of interest to 4% was
agreed upon for this new capital. At the end of the reign of George
I, the total debt, funded and unfunded, was estimated at about
$249,600,000 and the charge for interest at about $5,844,245."
During the first part of the reign of George II (1727-60), under
the wise administration of Walpole, peace and financial progress
continued. In 1739, however, there began a long war, first with
Spain and afterwards with France and Spain together, which even-
tually added some $144,000,000 to the national debt. Even under
these conditions the Government was able to borrow at from 3%
to 4%. In 1749, a law was passed providing for an important con-
version of the public debt. All the public creditors who had been
receiving interest at the rate of 4% were to have the rate reduced
after December 25, 1750, to 3!%, until December, 1757, and after
that date to 3%. Most of the creditors ultimately accepted this
offer, and those who refused were paid off. Debts originally con-
tracted at 3% were united in another fund called the 3% consoli-
dated annuities. This latter operation was the origin of the 3%
consols. It is a startling fact that British credit at this time stood
as high as it did in 1910-12.'
The debt in 1756, at the begiiming of the Seven Years' War,
» Hirst, The Credit of Nations, pp. 15-16.
* Ibid., pp. 16-17. for an account of Sir Robert Walpole's Sinking Fund, see
Hamilton, pp. 526-30.
' Ibid., pp. 17-18.
36 AMERICAN AND FOREIGN INVESTMENT BONDS
exclusive of interest and annuities, was about $356,794,334.*
About $288,000,000 was added to the debt by the Seven Years'
War, which was far more costly than its predecessors; and 3 per
cents fell far below par.^ The principal of the debt at the Peace of
Paris in 1763 was about $666,554,064. After a considerable reduc-
tion during the years of peace, the debt stood at the beginning of
the American War, in 1775, at about $617,201,448 of principal and
about $21,463,541 of interest and annuities.' By this time it was
. dear that the national debt was growing at a dangerous rate; and
it had all been spent on war. From a financial point of view, how-
ever, the war with the American colonies proved more disastrous
than any of its predecessors. This was partly owing to the mis-
management of the finances. In 178 1, a fimding operation was put
through by which about $100,800,000 was added to the capital of
the debt and only about $57,600,000 reached the Exchequer. The
credit of the coimtry went from bad to worse. In August, 1774,
before the beginning of the American Revolution, 3% consols had
stood at 89. They had fallen more or less steadily during the war,
imtil at the surrender of Lord ComwaUis they were quoted at 54.*
The debt at the Peace of Versailles in 1783, which ended the Ameri-
can War, stood at about $1,199,287,814 of principal and about
$45,368,506 of interest and annuities.
At the beginning of the French Revolutionary wars in 1793, the
principal of the British debt, according to Hamilton, stood at
about $1,171,769,448.^ In September, 1815, — before the Peace of
Paris which closed the Napoleonic wars, — the principal of the
debt, including apparently floating or unfunded debt, amounted
to the enormous sum of $4,132,987,435, and interest and annuities
to $156,698,966, or a total, funded and unfimded debt, of about
$4,289,686,401.^ In the opinion of Professor Levi, England would
have done better to have fought the Napoleonic wars more with
taxes and less with borrowings.'' A large part of this debt had been
contracted at "ruinous rates." Between 1793 and 1815, on an
average $830.40 of stock was created for every $480 of money
obtained, so that the country reaUy received only $1,627,831,200,
« HamUton, p. 500. « Hirst, p. 18. 3 Hamilton, p. 500.
• Hirst, pp. 19-20. » Hamilton, p. 500.
« Fenn (1867), p. 6. ' Levi (1862), p. 314.
UNITED STATES AND FOREIGN GOVERNMENT BONDS 37
or $1,188,316,766 less than it engaged to pay.^ Between 1800
and 1810, taxation amounted to nearly 25% of the estimated na-
tional income.* In 1816, the charge for interest was more than half
of the whole public revenue from taxes. The national credit was
much impaired. During the French wars, the price of 3% consols
fluctuated between a maximum of 73 and a minimimi of 47.' In
June, 181 5, the month of Waterloo, the lowest price reached for
consols was 53I.*
After Waterloo, the condition of Great Britain was very bad and
the financial recovery slow. In 1822, Vansittart introduced a
scheme which led to the conversion of the 5 per cents with a large
saving of interest and which also provided for the establishment of
a real sinking fund. This was created through making provisions
for net surpluses in the revenue and applying the same to the reduc-
tion of the debt — the only sort of national sinking fund which
means anything.^ Between 1823 and 1832, consols fluctuated be-
tween 72 for the lowest and 97 for the highest.® The amount of the-
debt in 1854 as given by Baxter was about $3,842,400,000, a con-
siderable reduction from the debt at the close of the Napoleonic
wars. The Crimean War which lasted about two years (1854-56)
raised the debt, including annuities, to about $4,003,200,000.' The
low point for consols during this period was 85I in March, 1854.*
In the next twenty-one years, about $336,000,000 of debt were
extinguished; and in the twenty years after 1877, the reduction
amounted to about $590,400,000.' These relatively large reduc-
tions of debt, combined with generally favorable financial condi-
tions, led to the record high price for British consols on July i,
1896. At this time, as 2I per cents, they sold at 114, or on an in-
come basis of about 1.95%.^° In 1899, the debt stood at about
$3,048,000,000.^^
From this figure in 1899, the lowest point in the British debt
' Levi (1862), pp. 315-16. ' Ibid., p. 319. " Hirst, p. 21.
' Messrs. Frederic C. Mathieson & Sons, London, England; enclosed in letter
dated April 29, I9r3.
' Hirst, p. 21. ° Mathieson letter dated April 29, 1913.
' Baxter (1871), p. 9. ' Mathieson letter dated April 29, 1913.
' Hirst, p. 22.
*" Figures from F. C. Mathieson & Sons. This yield is allowing for loss, if redeemed
at due date (1923) at par, and for a reduction of interest in 1903.
'' Hirst, p. 22.
38 AMERICAN AND FOREIGN INVESTMENT BONDS
since the Napoleonic wars, the national debt rose in consequence
of the Boer War to $3,374,400,000 in 1901 and to $3,830,400,000 in
1903. This was the largest debt since 1867, "so that the national
savings of thirty-six years of peace were swept away by national
borrowings during three years of war." ^ In the opinion of Mr.
Hirst, editor of the "London Economist," more immediate injury
was done to British credit by the financial policy which preceded
the war than by the actual outbreak and carr)dng on of the war.
The increasing expenditure before the war, the mismanagement of
the sinking fimd, and the apprehension of trouble in South Africa
led to a greater fall in consols than did the actual outbreak and
progress of the war.^ Between March 31, 1906, and March 31,
1909, with Mr. Asquith as Chancellor of the Exchequer, the na-
tional liabilities were reduced by about $201,600,000.' In spite of
this fact and owing probably to general financial conditions, the
price of consols continued to siok until they reached a figure of
72I on October 14, 1912.*
Baxter has estimated the percentage ^ of debt charge to national
income of Great Britain and Ireland at different dates as follows:
1700, 2.3%; 1712, 4.5%; 1736, 2.3%; 1784, 6.2%; 181S, 9%; 1843,
5.5%; 1870, 2.8%. These compare with our figure of 1.09% in
1912.
As Professor Bastable remarks, the growth of the English debt
has been due altogether to war expenditure. It is all what may be
called a "dead-weight" or improductive debt.* Writing in 1895,
Professor Bastable considered that the reduction in the English
debt during years of peace had been far from satisfactory. He held
that the continued existence of such a big debt must be attributed
largely to financial weakness.^ At the same time, while the British
debt up to 1 91 2 had not been reduced to the extent that it might
have been, the burden of the debt, owing to reductions in interest
' Hirst, pp. 24-25. ' Ibid., pp. 23-24.
' Ibid., p. 25. (For the various conversions of the English debt and for the history
of the sinking fimd, see Hirst, pp. 26-39.)
* Figures from F. C. Mathieson & Sons.
6 In estimating the debt charges from 1784-1870, Baxter has deducted the amounts
estimated as paid for reduction of capital. (Baxter, National Debts, p. 18.)
» With the exception of "Other Liabilities," which represent mostly productive
objects. {Statesman's Year-Book [London, 1913I, p. 49.)
' BasUble (1895), p. 594.
UNITED STATES AND FOREIGN GOVERNMENT BONDS 39
and to the great increases in national wealth and national income,
was becoming steadily less. The great European War wiU add a
new and extremely interesting chapter.^
If we foUow the historical order, the debt of Austria probably
should be considered next. The financial and debt history of Aus-
tria is far from pleasant reading. From the latter part
of the eighteenth century until the latter part of the
nineteenth century (say, 1789-1870), there was not a year in which
the revenue of the State equaled its expenditure. In 1763, at the
end of the Seven Years' War, the capital of the debt, according to
Baxter, was about $72,000,000. In 1789, it had increased to about
$168,000,000. During the disastrous wars of the French Revolution
and of the First Empire, the debt increased rapidly. Inconvertible
bank-notes were issued on a large scale. ^ From 1799, the bank-bills
feU lower and lower until they sank to about one seventeenth of
their normal value. An imperial mandate of February, 181 1, con-
tained these words: "I give my imperial word that the bank-bills
shall never be reduced in value." ' March 26, six weeks later, the
Government reduced the value of the paper money, which had
increased to $515,849,000, to one fifth of its previous amount. By
this process the paper money was reduced to $103,169,800. This
was increased again in 1816 to $310,969,350. The new paper
money soon fell to one quarter of its nominal value — thereby
making the total loss nineteen twentieths. The owner of what
had been originally $48.67 reaUy possessed but the value of $2.40.*
The total Austrian debt in 1811 was about $392,570,822. The
wars of 1813 to 1815 required fresh sacrifices. There was also ex-
travagance on the part of the Government. In order to get rid of a
burdensome floating debt, new operations were begun in 18 16
nearly equal to a second bankruptcy. The owners of paper money
were given the option (i) of exchanging it for two sevenths of its
value in bank-notes and accepting State paper at 1% for the re-
maining five sevenths; or (2) of exchanging the paper money for
' For detailed official history of the British national debt see: National Debt History
oj the Early Years of the Funded Debt from l6g4 to 1786 (London, 1898) ; National Debt;
the report by the Secretary and Comptroller-General of the Proceedings of the Com-
missioners for the reduction of the national debt from 1786 to 31st March, 1890
(London, 1891).
" Baxter (1871), p. 65. " Tenth Census, vol. vn, p. 275. * Ibid.
40 AMERICAN AND FOREIGN INVESTMENT BONDS
shares in the newly established "National Bank."^ In 1820,
according to Baxter, the debt amounted to about $473,760,000.^
Between 1820 and 1840, loans followed one another rapidly — in-
cluding lottery loans. The Mettemich system, adopted from 181 1
to 1840, increased the debt so that the annual interest rose from
$3,747,205 to $19,806,665. After the pressing financial embarrass-
ments in 1846 and 1847, the Revolution followed in Vienna, Hun-
gary, and Italy in 1848. Paper money again was issued to an enor-
mous extent.^ Baxter speaks of the successive deficits as having
brought the debt in 1848 to about $600,000,000.*
The wars with Himgary, Italy, France, and Pnissia and the
large miHtary establishments in the intervals caused an enormous
increase in the Austrian debt, and raised it in 1868 to about $1,444,-
800,000.^ Writing a few years earlier. Professor Leone Levi spoke
of the financial condition of Austria for a long series of years as
" ruinous in the extreme." *
At one time the Government unfairly reduced the interest on the
debt to one half its original percentage, and then forced creditors
to contract a further loan imder threat of loss of their previous
claim.^ Mulhall gives the combined debts of the Austro-Hungarian
Empire in 1875 and 1889: 1875, about $1,948,800,000; 1889,
$2,785,920,000.8
Comparatively recent large additions to the Austro-Hungarian
debts have been made for the acquisition of state railways and for
public works.^ Baxter has estimated the percentage of debt charge
to national income for Austria at different periods as follows:
1815-20, 1.8%; 1837-43, 2.2%; 1868-70, 2.2%."' These com-
pare with oiu: figure in 1912 of 3.76%. Since the beginning of
the present war, Austria has refused to pay interest or princi-
pal of notes held by citizens of enemy countries. Later on in this
chapter, we give highest and lowest prices of Austrian rentes by
ten-year periods from 1873 to 191 2 inclusive.
' Tenth Census, vol. vn, p. 275. ' Baxter (1871), p. 65.
' Tenth Census, vol. vn, p. 275. ♦ Baxter (1871), p. 65.
» IbU.
' Journal oj the Royal Statistical Society (1862), vol. xxv, p. 327.
' Tenth Census, vol. vn, p. 275. ' MulhaU (1899), p. 267.
' Hirst, p. 9. See also Encydopadia Britannica (nth ed., 1910), vol. n, p. 976;
vol. xm, pp. 899-900.
" Baxter, pp. 89-92.
UNITED STATES AND FOREIGN GOVERNMENT BONDS 41
The debt of what is now the United States originated during the
American Revolution.^ In July, 1776, Silas Deane, political and
commercial agent for the United States in France, . ,
,^ T-r. ,. ,,,., ,, United States
met Caron de Beaimiarchais, who had mduced the
French king to aid the American colonies — perhaps partly in
revenge for the loss of the great French Empire in America in the
Seven Years' War. Apparently $195,000 had been advanced by
the French Treasury, June 10, 1776. Later, Beaumarchais ar-
ranged, under the guise of an ordinary commercial contract, to
furnish the colonies with arms, ammunition and supphes. This,
with the early domestic loans of the Continental Congress ^ and
the loans of the separate colonies or States for war purposes, was
the origin of our national debt.*
The first foreign loan negotiated by the Continental Congress
was obtained in 1777 from the "farmers-general of France," a
private corporation engaged in the collection of the national reve-
nue of France. Up to that time the expenses of the Revolutionary
Govermnent in Europe had been met by small subsidies from
France and Spain and by such remittances in specie as could be
spared from home.* From 1778 to 1782 various sums were ad-
vanced or loaned the United States by France. A contract for the
repayment of these sums was drawn up and dated July 16, 1782.
The total amount — $3,510,000 — was to bear 5% interest and to
be repaid in twelve annual payments of about $292,500 each, be-
ginning the third year after the conclusion of peace. The arrears of
interest to the date of the contract and then to the date of the
treaty of peace were to be made a gift by France.^ Although peace
was made in 1783, the repayment actually began in 1791, and was
made to the Revolutionary Government of France. The last
' From the close of the seventeenth and the early part of the eighteenth century
unta the time of the Revolution, Massachusetts, South Carolina, New York, and
other colonies had outstanding at times varying amounts of so-called bills of credit or
paper money. For the history of these issues, see Horace White, Money and Banking
(Boston, 1902), pp. 103-114.
2 After March i, 1782, interest on the domestic debt was not met, and certificates
of interest indebtedness, receivable for taxes by the States, were issued. (Davis R.
Dewey, Financial History of the United States [New York, 1915], p. 46.)
' Rafael A. Bayley, The National Loans of the United States from July 4, 1776, to
June 30, 1880. Tenth Census, vol. vn, pp. 299-301. Davis R. Dewey, Financial His-
tory of the United States (New York, 1915), pp. 4S-47-
« Tenth Census, vol. vn, p. 304. ' Ibid., p. 305.
42 AMERICAN AND FOREIGN INVESTMENT BONDS
payment was made in 179S, at which time the small balance due
was converted into s|% stock. All this loan was repaid.^
The financial situation of the Continental Congress was at its
worst in 1779 and 1780. Over $200,000,000 in Continental cur-
rency had been issued — which in 1780 "quietly expired in the
hands of its possessors." The army was badly in need of food and
clothing.^ In 1781, a loan of $1,950,000 was obtained in Holland
on the credit of France.' This loan was provided for in the contract
drawn up July 16, 1782, — signed by the Comte de Vergennes and
Benjamin Franklin.* The repayment of the principal of this loan
was begun in 1792, and a small unpaid remainder ($176,000) was
converted in 1 795 into 4!% stock. Later this stock was redeemed.*
In 1783, another loan was obtained from France; and between 1782
and 1794, eleven loans were raised in Holland and one in Antwerp
(1791). These loans were all repaid in fuU.®
On assuming the position of Secretary of the Treasury, in 1789,
Alexander Hamilton found himself temporarily without funds to
meet the ordinary expenses of the Government. Under these cir-
cumstances, he decided to negotiate temporary loans with the Bank
of New York and the Bank of North America. These loans were all
repaid by 1790.^
The indebtedness of the United States at the organization of the
present form of government, including arrears of interest to Janu-
ary I, 1790, was: —
Principal of foreign loans $10,098,706.02 "
Balance due France for military supplies 24,332. 86
Arrears of interest to January i, 1790 1,760,277. 08 '
Debt due foreign officers i86,q88. 78 '
Arrears of interest to January i, 1790 11,219. 32
Principal of domestic debt (estimated) 28,858,180. 65
Arrears of interest to January i, 1790 11,398,621. 80
Arrears and claims against the late government outstanding and
subsequently discharged 450,395. 52
Total debt of the United States January i, 1790 $52,788,722.03
1 Tenth Census, vol. vn, p. 306. * Ihid. See also Dewey, pp. 36-41.
' There was also in 1781 a small loan or advance of moneys from Spain. The
Spanish debt — $174,011 — was repaid in 1792-93. {Tenth Census, vol. vil, p. 306.)
* Tenth Census, vol. vn, p. 307. ' Ihid., p. 308.
» Ibid., pp. 309-22. ' Ibid., pp. 322-24.
' Not only had the United States been delinquent in the payment of interest on the
foreign loans for periods varying from four to six years, but it had failed to pay the
installments of principal which began to be due in 1787. (Dewey, p. 89.)
• Part of the amount due foreign officers who had fought in the Revolution was
UNITED STATES AND FOREIGN GOVERNMENT BONDS 43
To this total should be added the debts of the several States —
estimated by Alexander Hamilton at that time to aggregate about
$25,000,000.
There were two kinds of debt about the settlement of which there
was no dispute: (i) the foreign debt loaned in gold on the faith of
the Continental Congress; and (2) paper money issued by Congress
and by the several States. The foreign debt was paid in full; the
paper money sank to no value and passed out of circulation.^
By an act approved August 4, 1790 (Acts of ist Congress, Session
2, chap. XXXIV, I Stat. L., p. 138), provision was made for the
payment of the debt of the United States. Section 2 of this act
authorized a loan of not over $12,000,000, to be applied to the pay-
ment of principal and interest of the foreign debt. Section 3 author-
ized a loan to the full amount of the domestic debt, payable in certi-
ficates issued for the said debt according to their specie value and
computing the interest upon such as bore interest to December 31,
1790.^ Section 13 authorized a loan of $21,500,000 to take care of
the debt incurred up to January i, 1790, by the respective States
for the expenses of the war. Section 21 pledged the faith of the
United States to make good any deficiencies in income necessary
for interest on the debt, and section 22 provided for the creation of
a siiiking fund from the proceeds of the sales of western lands.
The evidences of the domestic debt and of the debts of the sev-
eral States were taken in exchange on a basis which resulted as
follows: In the case of the domestic debt, the National Goverrmient
paid the interest immediately, on two thirds of the principal only,
at 6%; it deferred interest on the remaining one third for ten years;
and it allowed 3% interest on the arrears of interest — making up
nearly one third of the whole debt. In assuming the debts of the
various States, the Government paid immediately interest at 6%
on four ninths of the entire sum; on two ninths it deferred interest
for ten years ; and it allowed only 3% on three ninths.* The amount
of State debts actually assumed was $18,271,786.47.*
paid in cash in 1782 and part in 6% certificates of indebtedness. By 1803 most of
these certificates had been redeemed and by 1828 all. {Tenth Census, vol. vn, p. 322.)
1 Tenth Census, vol. vn, p. 325.
' This section also authorized refunding United States bills of credit or Continental
currency on the basis of $100 of currency to $1 of specie.
' Alexander Hamilton, Works (1851), vol. IV, pp. 251-52. Dewey, p. 95.
• Tenth Census, vol. vn, p. 327.
44 AMERICAN AND FOREIGN INVESTMENT BONDS
By an act of August 12, 1790 (Acts of ist Congress, Session 2,
chap. 47, I Stat. L., p. 186), provision was made for reducing the
debt by purchase at market price — not exceeding par or the true
value thereof — from the surplus revenue derived from the duties
on imports and the tonnage of ships or vessels to December 31,
1790.^ This was followed by acts approved May 8, 1792, and
March 3, 1795, establishing a formal sinking fund.^
On January i, 1801, the debt of the United States stood at
$80,038,050.' Under Jefferson's administration, with Gallatin
as Secretary of the Treasury, the poHcy of public retrenchment
with a view to the reduction of the debt and of taxation took the
field. The result was a remarkable reduction of debt between 1801
and 1812. The net reduction was $38,000,000, but the real amount
paid off was larger; for the Louisiana Purchase was responsible for
an increase of $11,250,000 in the indebtedness.'*
The increase in the public debt caused by the War of 1812 was
nearly $88,000,000.^ A committee of the House of Representatives
estimated years afterwards that during this war the actual value
in specie of the Treasury receipts for over $80,000,000 par value
of loans was only $34,000,000. As illustrating the credit of the
United States at this time, a 6% loan was put out in August,
1813, at 88|. Afterwards portions of a 6% loan were sold as low
as 65 measured in specie.® In January, 1816, the debt stood at
$127,334,933.7
After 1822, owing to constant surpluses in the revenue, the
reduction of the debt was rapid; ^ and in 1836 the United States
for the first time in its history was practically out of debt. There
was a small unpaid balance, — $328,582.10, as estimated Decem-
ber 8, 1835, — which remained unpaid solely because payment had
not been demanded. Under an act of June 23, 1836,^ surplus reve-
nue to the amount of $28,101,644.91 was distributed to the several
States. 10
' Tenth Census, vol. vn, p. 327.
' Acts of 2d Congress, Session i, chap. 38, i Stat. L., p. 281.' Acts of 3d Congress,
Session 2, chap. 45, i Stat. L., p. 433.
' Financial Review (1915), p. 90. * Hirst, p. 106; and Dewey, pp. 119, 121, 124.
^ Tenth Census, vol. vn, p. 352. ' Dewey, p. 134.
' Financial Review (1915), p. 90. ' Hirst, pp. 109-10. Dewey, pp. 170-71.
• Acts of 24th Congress, Session i, chap. 115, s Stat. L., p. 52.
" Tenth Census, vol. vn, p. 361.
UNITED STATES AND FOREIGN GOVERNMENT BONDS 45
In 1837, a year of general suspension of specie payments by the
banks, Treasury notes were issued by the Government on a large
scale. ^ There was a considerable deficit — amounting in Septem-
ber, 1837, to about $2,000,000. Further issues of notes were made
from 1838 to 1843 inclusive, and longer loans were made in 1841
and 1842. These, like the Treasury notes, were put out to take care
of constantly recurring deficits and the constantly accimiulating
debt.2
The net indebtedness created by the Mexican War (1846-48)
was $49,000,000. All the loans, bearing 6% interest, were floated
at par or better.^ Among these was a loan of $16,000,000 issued
under an act approved March 31, 1848,* to take care of deficits
occasioned by the war.^
On July I, 1851, the debt stood at $68,304,796. From that year
it was reduced until in 1857 the net debt — principal of the debt
less cash in Treasury — was only $9,998,622. The panic of that
year, followed by the failures of the revenue imder a system of low
tariffs, caused an increase in the debt until it reached $59,964,402
on July I, i860.*
The Civil War bears much the same relation to American debt
history as do the Napoleonic wars to British debt history. This
great struggle caused an enormous increase in the debt of the
United States; but owing to the great prosperity which followed
the war, this large debt was reduced until it ceased to become
much of a burden. In acts approved July 17 and August 5, 1861,^
Congress authorized a loan of not over $250,000,000 — the first
important loan authorized to carry on the Civil War. There were
issued under these acts $150,000,000 Treasury notes bearing 7.3%
interest and $50,000,000 twenty-year 6% bonds.* On December 30,
1861, the banks suspended specie payment and were followed in
' There had been consideiable issues of Treasiuy notes dviiing the War of 1812.
(See Dewey, pp. 136-37.)
' Tenth Census, vol. vn, pp. 361-63. In 1841, the Secretary of the Treasury in-
formed Congress that during the previous four years, the expenditure had exceeded
the revenue by $31,310,014. (Ibid., p. 362.)
' Dewey, pp. 255-56. * Acts of 30th Congress, Session i, 9 Stat. L., p. 217.
' Tenth Census, vol. vn, p. 367.
' Financial Review (1915), p. 90; and Hirst, p. iii.
' Acts of 37th Congress, Session i, chaps. 5 and 46, 12 Stat. L., pp. 259, 313.
• Tenth Census, vol. vn, pp. 375-84. Dewey, pp. 276-81, 306.
46 AMERICAN AND FOREIGN INVESTMENT BONDS
this by the Government.^ February 25, 1862, there was passed
the famous Act ^ authorizing among other things: (i) the issue
of $150,000,000 legal-tender United States notes; (2) the issue of
$500,000,000 6% bonds payable in twenty but redeemable after
five years — familiarly known as the "five- twenties"; and (3) the
creation of a sinking fimd. Under this and later acts, there were
issued something like $450,000,000 of legal-tender notes or paper
money. There were also issued enormous amounts of short-term
Treasury notes. Long- and short-term loans followed each other in
rapid succession in 1863, 1864, and 1865. In July and August, 1864,
the average price in gold of the paper money or "greenbacks" was
thirty-nine cents on the dollar. On July i, 1864, the premium on
gold measured in paper currency reached one himdred and eighty-
five per cent. The total effect of paper issues in increasing the cost
of the war has been estimated at between $528,000,000 and $600,-
000,000.' The following prices,* during the Civil War, of United
States 6% bonds due in 188 1 may be of interest: —
Lffuj
High
1861 (outbreak of wax)
1861
1862
1863
1864
i86s
84i (April)
83 Qune)
87^ (January)
gif Qanuary)
102 (July)
103I (March)
94 (April)
QSf (October)
107} (June)
iiof (October)
118 (April)
iizf (January)
The debt reached its maximum on August 31, 1865, when it
amounted to $2,756,431,571.^ Of the gross debt, about $1,110,000,-
000 was funded debt, about $460,000,000 inconvertible paper, and
about $1,276,000,000 floating debt. The cash reserves in the Treas-
ury amounted to about $88,000,000.* The annual interest charge
on the debt was about $151,000,000.^
The problems which faced the new Secretary of the Treasury
after the war were: (i) How to pay off or fund the floating debt,
and (2) how to provide a permanent scheme of debt reduction.
' Dewey, p. 281. ' Acts of 37th Congress, Session 2, chap. 33, 12 Stat. L., p. 345.
" Dewey, pp. 284-97 and 306. ♦ Financial Review (1915), p. 91.
' Ibid., p. 90.
• Bastable (1895), p. 606. See also Dewey, pp. 316-17 and 332-33.
» Bastable (1895), P- 6o7-
UNITED STATES AND FOREIGN GOVERNMENT BONDS \^
Soon after the dose of the Civil War, the revenues began to show a
surplus over expenditures. This surplus was applied from time to
time to the redemption of short-term obligations.^ Such portion of
these obligations as could not be redeemed for lack of ftmds was
converted into five-twenty bonds as authorized by the Acts of
March 3, 1865,^ and April 12, 1866.' In a little over two years, the
floating debt was reduced to $408,000,000 and the inconvertible
issues reduced by over $20,000,000, while new funded debt to the
amount of $686,000,000 in 6% bonds had been issued. These
transactions were completed by May i, 1869.^ The Government
then began using the surplus revenues in the purchase of its un-
matured bonds at the market price in currency. It paid, in terms
of gold, $307,702,207.64 for bonds so purchased. The average
price in gold was $95.19.^ R. Dudley Baxter has estimated the
burden of the American national debt and the American state
debts on the basis of annual debt charge to estimated annual in-
come for 1868-70 at 2.7%.^
Under Acts of July 14, 1870 ^ and January 20, 1871,^ there were
authorized to be sold, at not less than par in coin, $5op,ooo,ooo
5% ten-year bonds, $300,000,000 45% fifteen-year bonds, and
$1,000,000,000 4% thirty-year bonds, the proceeds to be applied
to the redemption of the war debt. The refunding operations under
these acts began in 1871 and continued until the summer of 1879.
A total of $1,395,345,950 bonds were refunded under these acts;
and the annual saving in interest to the Government was $19,900,-
846.50. On January i, 1879, specie payments were resumed. As
the remaining Civil War debt matured, it was either continued at
a lower rate of interest or redeemed in gold. The continued bonds
also were redeemed from time to time as the surplus revenues per-
mitted until no bonds remained outstanding except those author-
ized by the refunding acts. These last-mentioned bonds from
' V.S. Treasury Department, Circular 52 (Washington, 1913), p. 8.
' Acts of 38th Congress, Session 2, chap. 77, 13 Stat. L., p. 468.
' Acts of 39th Congress, Session i, chap. 39, 14 Stat. L., p. 31.
' U.S. Treasury Department, Circular 52 (Washington, 1913), p. 8; and Bastable
(1895), pp. 606-07.
' U.S. Treasury Department, Circular 52 (Washington, 1913), p. 8.
' Baxter, National Debts (1871), p. 92.
' Acts of 4rst Congress, Session 2, chap. 256, 16 Stat. L., p. 272.
' Acts of 41st Congress, Session 3, chap. 23, 16 Stat. L., p. 399.
48 AMERICAN AND FOREIGN INVESTMENT BONDS
time to time were purchased with surplus revenues or redeemed
as they became redeemable. The last of them — the residue of the
4% bonds of 1907 — were called for redemption April 2, 1907, and
ceased to bear interest July 2 of that year.^ The redemption of the
American Civil War debt has been regarded by experts as Httle
short of astoimding. It makes the reduction of the British debt in
the himdred years after the Napoleonic wars seem relatively in-
significant. The methods by which the United States reduced its
debt have been criticized;^ but the result everywhere has been
admired. The United States paid off its Civil War debt in the
wholesale, wasteful, imscientific, but effective American way.
The following figures give an idea of the extent and rapidity of
the reduction of the debt: —
NET DEBT'
July I, 1865 $2,674,815,856
July I, 187s 2,090,041,170
July I, 1885 i,37S>352,443
July I, 1893 838,969,476
We have closed the statement with 1893 because in the following
year new borrowings began.
The protective tariff, whether wise or unwise from any other
point of view, undoubtedly was one of the chief factors which made
possible the large reduction in the Civil War debt. The Wilson
Tariff Act of 1894, on the other hand, combined with the effects of
the panic of 1893 and the fijiandal heresies which followed, led to
a considerable enlargement of the United States debt. Between
1894 and 1896, $262,315,400 of bonds were issued either to main-
tain the gold reserve of the Treasury or to redeem obligations of the
United States.* On July i, 1896, the net debt stood at $955,297,-
254. The war with Spain in 1898 brought the debt on July i, 1899,
to a net figure of $1,155,320,235. From this date, there was a more
or less steady reduction until 1908, when the debt stood at $938,-
132,409.^ Since then there has been a moderate increase in the debt
' U.S. Treasury Department, Circular 52 (Washington, 1913), pp. 9-11.
' Baxter (1871), p. 31, and Hirst (pp. 122-23). ' Financial Review (1915), p. 90.
* U.S. Treasury Department, Circular 52 (Washington, 1913), pp. 11-12. See also
Dewey, pp. 449-55-
' Financial Review (1915), p. 90. Dewey, pp. 465-68.
UNITED STATES AND FOREIGN GOVERNMENT BONDS 49
through the issue of bonds for the construction of the Panama
Canal ^ and for the postal savings banks. As illustrating the high
point which United States credit has reached, the Government was
able in 1900 to issue 2% bonds at not less than par to refund issues
bearing higher rates of interest.^ These bonds were, to be sure,
particularly attractive as a basis for national bank-note circulation.
Their issue, however, together with the prices of aU United States
bonds for the past ten or a dozen years, showed the credit of the
United States to be as high as, if not higher than, that of any other
nation in the world.
Russia, like Austria, has been a country of paper money and of
more or less continual deficits. Paper money was issued as early
as the reign of Catherine II, under a manifesto dated
Russia
December 29, 1768. At the death of the Empress,
there had been issued assignats for $124,749,686. These became
largely depreciated as compared with coin.' Mulhall gives the
total debt of Russia in 1799 as about $225,600,000.* There were
further issues of paper money during the wars with Napoleon and
with Turkey. In 1810, the amount of the debt outstanding was
estimated at $456,295,206. The Czar Alexander I declared the
whole property of the State to be security for it. Three years of
war — 1812-15 — required $253,058,000 above the ordinary ex-
penditures. In 181 5, the assignats were exchangeable for silver
rubles on the basis of 418 to 100. After the Napoleonic wars, the
amount of the state debt acknowledged was not much above
$98,850,781, but the paper money in circulation amoimted to
something like $661,114,025.^
Loans payable in paper — 6% at 83^ — were contracted at
home in 1817 ; in 1818, paper loans abroad were contracted with 6%
interest at 85; in 1820, there was a silver loan abroad with 5% in-
terest at 72. For $31,632,250 of loans, the Government actually
received only $22,933,381. Later further loans were contracted at
77 to 77|. In 1823, the assignats or paper money in circulation
amounted to $471,320,525.* In 1839, an attempt was made to
restore the silver standard, and the exchange of the silver ruble for
> U.S. Treasury Department, Circular 52 (Washington, 1913), pp. 16-17.
' See Dewey, p. 471. ' Tenth Census, vol. vn, p. 272.
* Mulhall (1899), p. 266. ' Tenth Census, vol. vn, p. 272. • Ibid.
50 AMERICAN AND FOREIGN INVESTMENT BONDS
assignats was fixed at 350.^ Mulhall gives the total Russian debt
in 1840 as about $720,000,000.* In 1843, the former bank assignats
were withdrawn entirely from circulation by the creation of impe-
rial bills of credit, which, with the forced exchange, were to circulate
equally with the silver ruble. There came into existence $131,160,-
205 of such biUs, with which the 461,496,035 assignats which were
still current in 1843 had been redeemed. In this way was carried
through the compromise of the debt.'
The whole of the state property was to form security for the
newly created imperial credit notes, and was to form sufficient
capital for redemption. This state property was estimated at
$3,063,903,399, but the redemption fund was not sufficient.
Meanwhile the deficits in the state finances continued. In 1849,
the paper money was reduced to $237,505,474. During the Cri-
mean War, the issue of paper money increased greatly. In 1855,
there were issued temporary bills of credit for "all the extraordi-
nary expenses of the War " ! The Treasury did not wish to increase
taxes. The export of gold was forbidden, and the mass of paper
money issued was to be called in within three years after the resto-
ration of peace. As a matter of fact, however, the amount was not
diminished until long after this.* Dudley Baxter estimated the
Russian debt in 1858, two years after the Crimean War, at about
$1,152,000,000.^
In 1862, there was put out a silver loan to furnish means of re-
storing a metal standard. The paper money was to be exchanged
from May i, 1862, with a loss of io|%; afterward it was to be
exchanged at a higher rate so that it should be at par by January
I, 1864. A beginning was made, but the means available proved
insufficient. By a decree of November 19, 1863, payment of the
paper money again was deferred. The forced rate of exchange
returned and with it the variation of the standards. The Russian
state debt for many years increased in a most serious manner.
Deficits were becoming a permanent evU.* MuIhaU gives the total
Russian debt in 1875 as about $1,776,000,000 and in 1889 as about
$3,628,800,000. He gives the origin of the debt existing at this
time as follows:^ —
• Tenth Census, vol. vn, p. 272. ' Mulhall (1899), p. 266.
' Tenth Census, vol. vn, p. 272. * Ibid., pp. 272-73. ' Baxter (1871), p. 68.
• Tenth Census, vol. vn, p. 273. ' Mulhall {1899), p. 267.
UNITED STATES AND FOREIGN GOVERNMENT BONDS 5 1
Redemption of the serfs (1858-63) $408,000,000
RaUways and telegraphs 816,000,000
Crimean War 681,600,000
Turkish War 638,400,000
Sundries 1,084,800,000
Total $3,628,800,000
The Russo-Japanese War (1904-05) was responsible for a con-
siderable increase in the Russian debt. This debt has been huge
for many years; but the population and the resources of Russia
have also been huge — although the latter still are largely unde-
veloped. Baxter estimated the burden of the Russian debt, includ-
ing railway guarantees, for 1868-70, on the basis of debt charge
to estimated national income, as 2.5%.^ Our figure for 191 2, with-
out deducting debt incurred for railways, is 2.77%. So far as the
writer knows, Russia never has failed to fulfill her obligations to
foreign creditors.^ As illustrating the fluctuations in Russian credit
for the past forty years, Russian 4% railroad bonds (Nicolai)
sold in 1877 — at the outbreak of the Turko-Russian War — on
about a 6.49% income basis; in 189 1, they had recovered to about
a 4.06% basis; and in 1896, 4% railroad bonds sold to yield only
about 3.76%. In 1907, after Russia's defeat by Japan, Russian
4% rentes sold to yield about 5.89%.
The Italian Republics, as we mentioned in our introduction,
very early inaugurated the system of funded debts. Early in the
nineteenth century, the Kingdom of Naples was a large
borrower in proportion to her means and developed ^
a debt of about $120,000,000. The Kingdom of Sardinia before its
era of annexation was very economical, and In 1847 had a debt of
only about $24,000,000. The troubles of 1848 and the wars with
Austria and Russia increased the debt by 1858 to about $192,000,-
000. On the constitution of the Kingdom of Italy in 186 1, the con-
solidated Italian debt,' including more than $120,000,000 for that
of Naples, amounted, according to Baxter, to about $403,200,000,^
• Baxter (1871), p. 92. * Tenth Census, vol. vn, p. 273.
• A decree of July, i86i, for altering all former bonds into new 5% bonds for the
purpose of the unification of the state debts affected the creditors of the former states
in very unequal degrees, though generally very seriously. The market price of the
older bonds varied greatiy, but all were higher than the exchange for the new paper.
(Tenth Census, vol. vii, p. 274.)
• Baxter (1871), p. 58.
52 AMERICAN AND FOREIGN INVESTMENT BONDS
and according to Professor Levi, to about $432,000,000.^ Thus
Italy entered the family of nations burdened with a heavy debt
in proportion to her resources, which at that time were compara-
tively undeveloped.^
From 1 86 1 the debt increased rapidly. MulhalP gives the total
debt in 1870 as $1,598,400,000; in 1880, as $1,886,400,000; and in
1890, as about $2,208,000,000. A considerable part of this increase
was caused by continual deficits.* Mulhall gives the debt^ about
1890 as made up as follows: —
Railways, about $384,000,000
War and military expenditure 1,296,000,000
Sundries 528,000,000
Total $2,208,000,000
The participation of Italy in the Triple Alliance and the ambi-
tious colonial schemes under Crispi were responsible for a large
part of the increase in the Italian debt and for the decline in her
credit which at one time was so marked. In 1873, Italian 5%
rentes sold to yield an income of about 7.80%, and in 1894, sold on
about a 6.05% basis. Later, with the abandonment of her ambi-
tious schemes of expansion, Italian credit recovered. In July, 1906,
there took place a successful conversion of the 5% gross (4% net)
and the 4% net rentes into 3!% stock, to be reduced after five
years to 3!%. The amoimt converted was about $1,555,283,486,
and the saving in interest was about $3,840,000 per annum for the
first five years and about double that afterwards.® In January,
1913, Italian 3!% rentes sold to yield only about 3.65%. The na-
tional debt of Italy ever since the foundation of the modem king-
dom has been a heavy burden on the population and resources of
the country. Deficits have been frequent and the burden of taxa-
tion very great. ^ The interest on the debt has absorbed a large part
of the government expenditure. Yet Italians have repurchased a
large part of their national debt formerly held in other countries.
At the death of Frederick the Great in 1786, Prussia not only had
' Levi, Journal of the Royal Statistical Society (1862), vol. xxv, p. 327.
^ Hid. » Mulhall (1899), P- 268. < Baxter (1871), p. 58.
» Mulhall (1899), p. 268.
' Encyclopedia Briiannica (nth ed., 1911), vol. XV, p. 23.
' Bastable (1895), p. 603.
UNITED STATES AND FOREIGN GOVERNMENT BONDS 53
no national debt, but had about $52,500,000 in the government
vaults at Berlin, which money afterwards was used in „
,, .'_, -ri-.-^ ■, • ■, r Germany
the wars agamst Napoleon I.^ In 1800, the capital of
the debt, according to Baxter, was only about $25,200,000. By
1820, however, on account of the Napoleonic wars, it had risen to
about $148,800,000. This debt weighed heavily upon a nation of
10,000,000 to 11,000,000 people ruined by invasions and warfare.
Yet in 1842, nearly $48,000,000 had been paid off, and the debt
was reduced to about $100,800,000.^ This was done through the
sale of public property and through taxation. In 1848, the interest
charge was only about $3,120,000.'
After the Revolutions of 1848, a series of deficits took place
which increased the debt rapidly. Between 1850 and 1864 a num-
ber of loans were contracted for military preparations and for the
construction of great lines of railway. These loans brought the
debt in 1866 to about $201,600,000. The war with Austria brought
the debt in 1870 to about $272,160,000, to which should be added
the debts of the States aimexed in 1866, amounting to about
$46,560,000 — making a total debt for Prussia and annexed States
in 1870 of about $318,720,000.^ The total debt of the German
Empire and States in 1870 has been given by Baxter as follows: —
Prussia and annexed States $318,720,000
Remaining North German States 137,760,000
South German States 236,160,000
German Confederate loans of 1867 and July and Decem-
ber, 1870 127,680,000
Total capital debt, German Empire and States,
1870, about $820,320,000
Of this total capital, about $327,912,000 represented expendi-
tures for railways and pubUc works, so that the unremunerative
debt was only about $492,408,000. The total interest of the debt
in 1870 was about $35,232,000. To take care of this charge, the
German States had the net receipts of their railways and the pro-
duce of the public mines and iron works, which in Prussia, Saxony,
and other States balanced the interest of the debts.^ The accom-
1 Tenth Census, vol. vn, p. 277. ' Baxter (1871), p. 38.
» Bastable (1895), p. 604. ♦ Baxter (1871), pp. 38-39,
' Ibid., pp. 39-40.
54 AMERICAN AND FOREIGN INVESTMENT BONDS
panying table ^ shows the debts of Prussia and of the prindpal
German States combined, including Prussia, for 1881, 1891, 1901,
1908, and 1912.
DEBTS OF THIRTEEN GERMAN STATES
zSSi
iSffi
igoi
1908
ifii
$463,740,000
760,864,000
$1,376,824,000
791,780,000
$1,558,072,000
981,524,000
$1,879,268,000
1,236,168,000
$2,225,214,264
Twelve other states
1,471,428,046
Total
$1,224,604,000
$2,168,604,000
$2,539,596,000
$3,115,436,000
$3,696,642,310
$1.00 = so pence English
z mark = zx.8 pence English
Owing to the fact that such a large proportion of the debts of the
German States is for productive purposes, these debts have been a
very slight, if any, burden on the States. We have called attention
to this fact in estimating the burden of debt earlier in this chapter.
Baxter has estimated percentage of debt charge to national income
for Prussia and the German States, 1815-20, at 1.3%; for Prussia
and Germany, 1837-43, at .6%.^ If we deduct from the debts of
the German States the value of the railways, the burden of the
debt in 191 2 wiU prove very slight.
The imperial debt, however, is much more a dead-weight debt.
It has been created largely for military purposes. In 1881 , the debt
of the Empire was only about $63,200,800; in 1891, it had risen to
about $311,000,800; and in 1908, to about $1,003,826,000. Between
1881 and 1908, the imperial debt has been multiplied more than
fifteen times.' The expedition to China, the wars in Southwest
Africa, and the construction of the Kaiser-Wilhelm (Kiel) Canal
were responsible for an increase of about $195,408,000 in the
imperial debt.* By far the largest single item added to the debt on
behalf of all the States of the Empire is that for the imperial army
and the next largest item for the imperial navy.* In addition to the
funded debt of the Empire, there is a considerable floating debt
consisting of long-term and short-term Treasury issues. The first
' Hirst, p. 67, and Statistisches Jahrbuch (Berlin, 1913), p. 346.
' Baxter (1871), pp. 89-91.
• Hirst, p. s6. * Ibid., p. 57- ' Ibid., p. 58,
UNITED STATES AND FOREIGN GOVERNMENT BONDS 55
class increased greatly between 1898 and 1908.^ The debt charge *
of the German imperial debt was estimated by Baxter for 1868-70
at about 1% of national income. Our figure for the Empire in 1912
is .55%, and for the Empire and States combined, 2.13%.
It can be seen that the debt burden of the German States and
of the German Empire throughout their history has been compara-
tively shght.* The record of good faith and of debt payment also
has been in both cases excellent. The great European war wiU put
the German people, however, to a test of a severity never before
experienced or even probably clearly conceived. The credit of
Prussia and of the German Empire during recent years has corre-
sponded very closely.* It reached its highest point since 1873 ia
April, 1903, when Prussian 3^% consols sold to yield a net income
of about 3.48%.
The Japanese debt, like that of the German Empire, is a matter
of comparatively recent history. When the fiefs were surrendered
to the sovereign at the beginning of the Meiji Era
(1867), it was decided to provide for the feudal nobles
and the Samurai by the payment of lump sums in commutation or
by giving to them public bonds. On this account there were issued
$93,835,000 of bonds. This was the foundation of the Japanese
national debt. It represented the bulk of the State's liabilities dur-
ing the first twenty-five years of the Meiji period. There were
issued also $10,535,000 bonds in part payment for the debts of the
fiefs. The Satsuma Revolt in 1877 was responsible for a loan of
$7,350,000. Other loans were raised as follows: For public works,
$16,170,000; $6,370,000 for naval construction, and $7,105,000 in
connection with fiat currency — making a total of $149,450,000.
This represented the whole national debt of Japan for the first
twenty-eight years of her new era under imperial administra-
tion.'
The war with China (1894-95) caused a large increase in the
Japanese debt. The direct expenditures on account of the war were
' Hirst, p. 63.
' Baxter takes the debt charge exclusive of sinking fund and surpluses applicable
to a reduction of the debt. (1871), p. 44.
' Imperial taxation per head, however, almost quadrupled in the thirty-six years
between 1872 and 1908, having risen from about $1.42 to about $5.19. (Hirst, p. 52.)
* Hirst, p. 69. ' Encyclopcedia Britannica (nth ed., 1911), vol. xv, p. 218.
56 AMERICAN AND FOREIGN INVESTMENT BONDS
about $98,000,000, of which about $66,150,000 were added to the
national debt. Following the war there was begun a large pro-
gramme of armaments and public works. The expenditures for
the unproductive purposes, including coast fortifications, dock-
yards, and similar works, came to $153,860,000. The total for
productive expenditures — $93,100,000 — was made up partly
as follows: For railways, telegraphs, and telephones, $58,800,000;
$9,800,000 for riparian improvements; and $9,800,000 in aid of
industrial and agricultural banks and similar enterprises. The
whole programme, which, with trifling exceptions, was to be in
operation by 1905, involved an outlay of $246,960,000. Of this the
Chinese indemnity, the surplus of the annual revenue, and other
assets furnished about $147,000,000. It was the intention to raise
the remaining $99,960,000 through domestic loans. It was found
impossible to obtain the money necessary at home without paying
an excessive rate of interest. In 1899, a loan of about $48,000,000
at 4% was obtained in London. These bonds were sold at 90. In
1902, all Japanese domestic loans were on a uniform basis. They
carried 5% interest, ran for five years without redemption, and
were then to be redeemed within fifty years at the latest. The
redemption was to be by purchasing the stock in the open market
or by drawing lots. It was expected that the national debt would
reach its maximum — $281,750,000 — in 1903.^
The war with Russia, however, upset these calculations. Peace
came in the autumn of 1905. Japan had been obKged to borrow
$198,450,000 at home and $516,460,000 abroad. In 1908, the total
debt amounted to $1,115,240,000. Of this, $543,900,000 was
domestic debt and $571,340,000 represented foreign borrowings.
The debt had grown from $274,890,000 in 1904 to $1,115,240,000
in 1908, or from $5.54 per head in 1904 to $21.46 per head in 1908.
The debt carried interest of from 4% to 5%.* Soon after the war
with Russia, seventeen private railways were nationalized at a
cost of $245,000,000. This brought the state debt to $1,360,240,000
in all. In 1908, a scheme was adopted for appropriating at least
$24,500,000 annually for the purpose of redeeming the debt.' Ow-
ing to the undeveloped character of her resources and to the more
^ Encydopcedia Britannica (nth ed., 1911), vol. xv, pp. 218-19.
' Ibid. p. 219. ' Ibid.
UNITED STATES AND FOREIGN GOVERNMENT BONDS 57
or less confused condition of her finances, the debt incurred during
the war with Russia has been a very heavy burden upon Japan.
With her expansion in Korea and China, however, provided she
keeps out of further wars for some time, Japan probably will be
able to take care of this debt without serious trouble. The present
great war, in which Japan has been a participant, has added only
moderately to her financial burdens.
We have dealt at greater or less length with the debt histories of
the nations which to-day are considered the great Powers. We
have traced also in a general way the origin and devel-
opment of national debts in Europe and America, national
We have referred also to the epidemic of borrowing
which broke out in the second half of the nineteenth century and
which did not subside until aU the South European states, such as
Spain, Portugal, and Italy, and the Spanish and Portuguese states
of South America, had entered the money market. Some nations
borrowed for war, others for railways — but all borrowed. Be-
tween 1848 and 1873, the debts of the defaulting states of Spain
and her colonies tripled. They probably stopped even at this figure
only from the impossibility of further borrowing.^ In discussing
this situation ia 1874, Dudley Baxter divided the nations of the
world in debt matters into the following four classes:
(i) Economical states, whose debts grow less in proportion to
their resources.
(2) Vigorous borrowing states, that borrow freely but not beyond
their resources.
(3) Over-borrowing and declining states, whose debts are heavy
and continually increase more rapidly than their resources.
(4) Defaulting or insolvent states.
In the first class — that is, the economical states — Baxter at
that time placed the United Kingdom, Denmark, HoUand, Bel-
gium, the German States, the British Colonies and Sweden;^ in
the class of defaulting or insolvent states he listed Spain, Greece,
Ecuador, Mexico, Venezuela, San Domingo, and Honduras. Bax-
ter spoke of zones of credit around the center of good credit,
• Journal of the Royal Statistical Society (1874), vol. xxxvn, p. 8.
' He does not include the United States, which was then struggling to pay off its
great Civil War debt.
58 AMERICAN AND FOREIGN INVESTMENT BONDS
London. He referred to the countries of low interest as being all in
the North and all Teutonic, such as England, Denmark, Holland,
Germany, and Sweden.^ These observations have an interesting
bearing to-day.
Principal loans ^^^ accompanying table (page 59) shows the amount
in default, of loans of independent governments listed by the
1877-1914, as .
Usted by the Council of the Corporation of Foreign Bondholders as
of°^dgn " being in default as to principal at various periods
Bondholders between 1877 and 1912.
The figures for 1912 show only Guatemala and Honduras in
default as to the principal of their loans. Since 191 2, however,
Mexico again has joined the hst of defaulting states with an ap-
proximate amount of principal in default of $170,531,102.^
Perhaps, as bearing on credit, more important even than the
record of good faith is what may be called the general standing of
General ^ nation in the civilized world. This factor, indeed,
standing of a more than any other, may be said to determine na-
nation the . ■' ' , •' .
most important tional Credit at any given time. How do the great
nations of the world stand to-day? What are the
forms of their governments, the nature of their institutions, the
character of their people, and their military and economic posi-
tions? Are they developing or are they declining, or, as we some-
times say, are they "coming" or "going"?
We have indicated earher in this chapter the nature of the insti-
tutions of the United States. Its government, of course, is that of a
Forms of federal republic of independent or balanced powers,
f°™™s™tu- legislative, executive, and judicial. In the early days
CTeatpLwere— °^ ^^ RepubHc, pubhc Opinion was formed largely
United States through the exchange of views among a few leading
men. Actually the government was aristocratic rather than dem-
ocratic. After the people of the Eastern States crossed the Alle-
gheny Mountains, however, and settled the West, actual democ-
racy under the conditions of frontier life developed rapidly. From
the time of Andrew Jackson until the present, popular government
or government controlled by the will of the great mass of the people
' Journal of the Royal Statistical Society (March, 1874), vol. xxxvn, pp. 2-13.
' Council of the Corporation of Foreign Bondholders, Forty-First Annual Getieral
Report, p. 369.
UNITED STATES AND FOREIGN GOVERNMENT BONDS 59
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has grown steadily.^ To-day public opinion, instead of being
formed from the top downwards, is formed through newspapers
and otherwise from the bottom upward to the highest ofl&dals of
the Government. This, in our opinion, is a great factor in national
safety and in national credit. It means that back of any important
move on the part of the American Government is the opinion of a
majority, if not practically aU, of the American people.
Much the same situation prevails in England — though the
actual form of the Gtovenmient is that of a constitutional monarchy
with a ministry responsible to the House of Commons.
The Reform Bill of 1832 represented the spread of the
democratic idea in England. The Government of England before
that time had been a Government largely of country squires. With
the growth of manufacturing and of the cities and with the repeal
of the Com Laws, there developed a democracy based on indus-
trialism. Great impetus has been given to the democratic move-
ment in England during the past ten years.
The Government in France is a curious compromise between the
English and the American systems. The French Government of
to-day is more or less of a makeshift. It grew out of
the critical necessities of the French people after their
defeat by Prussia in 1871. Its efficiency remains to be proved.
The paternal nature of the Government, the centralization of
power, and the system of administrative courts, by which the acts
of the Government are dealt with under a different system of law
from that of the acts of individuals — aU are imfamiliar to the
Anglo-Saxon mind. In the Chamber of Deputies there exist a large
nimiber of groups of various shades of opinion instead of the two
parties with which Englishmen and Americans are familiar. Presi-
dent LoweU makes the point that since the Third Republic there
have been frequent changes in ministries, but no real changes in the
party in control of the Government.^ Incoherent as the French
govermnent sometimes seems, it has this one great underlying
virtue: it derives its authority from the people.
The Govermnent of Italy is that of a constitutional monarchy
' See E. L. Godkin, Unforeseen Tendencies of Democracy (Boston and New York,
1898), pp. 1-47 and 183-223.
' A. Lawrence Lowell, The Governments of Prance, Italy, and Germany (Cambridge,
1914)1 P- 114.
UNITED STATES AND FOREIGN GOVERNMENT BONDS 6l
with a parliamentary system. The ministers are responsible to the
popular House. Owing to the system of groups, however, rather
than parties, — which we have spoken of in connec-
tion with France, — the parliamentary system in
Italy does not work with anything like the smoothness and preci-
sion that it does in England. The power of the King sometimes is
considerable.^
The Government of Germany, imlike that of the others so far
mentioned, instead of being democratic in its general character, is
aristocratic and autocratic. There is, of course, a
popular house, the Reichstag, but the real power in
the government of the Empire and in practically all matters of
common interest of the various German States is exercised by the
Bundesrath or Federal Council — "that extraordinary mixture of
legislative chamber, executive council, court of appeal, and perma-
nent assembly of diplomats." * The Bundesrath is composed of dele-
gates appointed by the princes of the States and the senates of the
Free Cities.' Owing to the position of Prussia in the Bundesrath
and in the Empire, the German Emperor as King of Prussia is in a
position to control pretty largely the affairs of the Empire. There
is lacking any effective method of bringing to bear the force of pub-
lic opinion in matters of government. In Germany as in France,
moreover, there exists an extreme centralization and paternalism.
This is carried sometimes to the smallest matters in the daily lives
of the people.* Suppression of newspapers and of public meetings
for expressing sentiments contrary to the opinions of those high in
authority has been common.* Price CoUier has referred to the
conditions in Germany as " the governing of the people by suppres-
sion and strangulation." * All this has been done in the name of
efficiency. There is, in a broad way, an ominous similarity between
the relation of the German people to their Government at present
and that of the French people to their Government before the
French Revolution.^ The German people have a splendid record
» Lowell, pp. 125-27. ' Ibid., p. 191. ' Ibid.
* Price Collier, Germany and the Germans (New York, 1914), p. 399.
» Ibid., pp. 163-65. ' I^i^-> P- 498-
' For tie alternative of revolution under an extreme development of the protective
system, see Buckle's remarks on Spain, History of CivUizaUon (New York, 1861), vol.
n, pp. 123-24.
62 AMERICAN AND FOREIGN INVESTMENT BONDS
for the payment of their debts; but what will be their attitude if
they find themselves saddled with a debt of unprecedented and
almost unimagined size, incurred for a purpose which has proved
fruitless of results, disastrous to their economic and financial condi-
tion, and unfortunate in its effect on the relations of the German
people with the people of other nations?
The Government of Austria-Himgary is that of a constitutional
Empire composed of two autonomous kingdoms — Austria and
Austria- Hungary. Each retains a large measure of indepen-
Hungary dence. The personal power of the present Emperor,
Francis Joseph I, has been great. The bond between Austria and
Hungary, however, with their many divergent and sometimes an-
tagonistic races, is at best a weak one. If the present war should
have an unfortunate outcome for Austria-Hungary, it would leave
that country with its large debts in a situation which would offer
very little inducement to make new loans and perhaps even make
doubtful the collection of a large part of her present obligations.
The very existence of Austria-Hungary as one, or even as two
nations, is at present an enigma.^
The Government of Russia still is almost entirely autocratic —
though the machinery has been furnished for a later
development of something like popular government.
The rulers of Russia have shown a disposition to make concessions,
even though small ones, to the people. It is doubtful whether the
Russian people at present are fitted for a greater degree of self-
government than they now possess, though there are signs of dis-
quiet and discontent with present conditions. Many agrarian and
economic problems remain to be worked out, and the great natural
resources of Russia remain to be developed. Progress toward popu-
lar government in Russia will be either through concessions granted
by the Czars and the governing class or by revolution. There is
nothing at the moment, as far as the relations of the people to their
Government go, which would lead one to fear for the payment of
their national debt.
The Government of the only other coimtry under special con-
sideration — that of Japan — is a constitutional monarchy with a
■ For the system of government in Austria-Hungary, see Encydopadia Britannica
(nth ed., 1911), vol. ni, p. 2.
UNITED STATES AND FOREIGN GOVERNMENT BONDS 63
large amount of power in times of crisis or of great importance
in the hands of a small group of men known as the Elder States-
men. The Ministers of State or the Cabinet are ap-
pointed by the Emperor and are responsible to him
alone. ^ There is a diet of two houses. The Government seems to
work reasonably well.
The character of the population has an important bearing on
credit. The population of the United States is, on the whole, better
than that of any other great civiKzed nation. It has character of
vigor and ability, resourcefulness, knowledge, and the population
general individual efficiency of a high order. During the past one
hundred years the population of Great Britain has been much the
same. The English-speaking race as a whole has been during that
time the most remarkable of all the races of the world. The popu-
lation of France and Germany is highly intelligent and efficient.
That of Russia, while vigorous and patient, is lacking in resource-
fulness and adaptability. It is what may be called relatively unde-
veloped. It was not until 1863 that serfdom was completely
abohshed.^ The population of Austria-Hungary is the least homo-
geneous of aU the nations under consideration. Germans, Magyars,
Serbs, Czechs, Poles, and Croats live imder one scepter in a condi-
tion sometimes bordering on anarchy. The people of Japan are
notably homogeneous and have shown a remarkable adaptability
to modem ideas and methods. In the matter of education or liter-
acy, Germany, the United States, and Great Britain make the best
showing, and Russia, Hungary, Italy, and Japan ' the poorest.*
IlUteracy or ignorance is a bad companion for financial responsibil-
ity, though the two sometimes are found together. The character
of the population of many Central and South American countries
probably is the main reason not only for the instability of their
governments, but for their relatively low credit.
' Encyclopmdia Britannica (11th ed., 1911), vol. xv, p. 203.
' Ploetz, p. 500.
' Elementary education in Japan is now, however, compulsory. (JStatesman's Year-
Book [1915], p. 1091.)
* MuLhall (1899), p. 231. Webb (1911), p. 219. Statesman's Year-Booh (1915),
passim. In some parts of Russia, illiteracy is over 50%; in Hxmgary it is between 40%
and 45%; and in Italy between about 33% and about 49% as against 7.7% in 1910 for
the United States. {Statesman's Year-Book (i9iS),PP- 434> 700, 1060 and 1281.)
64 AMERICAN AND FOREIGN INVESTMENT BONDS
Another important factor in credit is the military standing of a
nation. History has shown that no nation that is not in a condition
Miutary of actual or potential military efficiency long con-
position tinues to have good credit. A striking illustration is
that of China with its immense population and wealth and its rec-
ord of good faith. The inability or unwillingness of China to defend
itself has kept its credit at a relatively low point. Germany, France,
Russia, Austria-Hungary, Italy, and the Balkan coimtries all have
adopted the policy of imiversal liability to military service.^ The
United States and Great Britain have followed the policy of main-
taining small standing armies and depending on volimteers in time
of war. If all countries adopt the plan of universal military service,
it will lose its value for any one coimtry; if all finally renounce it,
all countries will be equal in this respect and will have the advan-
tage of being able to use their resources for productive purposes. At
the same time, ability and willingness to fight when necessary are
absolutely essential imder any conditions known to human history
for the continuance of successful national existence. Without the
ability to defend its territory, population, and resources, a nation
has the least secure of all foundations for national credit. In this
respect the United States, with its enormous resources, its at-
tempted maintenance of the Monroe Doctrine, and its participa-
tion in the affairs of the Old World, is in a weak position at the
moment.^ At the same time it is only fair to say that the United
States, no less than the other great nations of the world, — Great
Britain, France, Germany, Italy, Austria-Hxmgary, Russia, and
Japan, — may be called actually or potentially a first-class military
nation.
Another important consideration in determining national credit
is the economic situation. This may be said to embrace the position
General ^^ ^ country in regard to farming and to its food sup-
economic plies, its position as to manufacturing and its position
as to internal and foreign commerce. That country
which comes the nearest to economic self-sufficiency is in the safest
position and has, other things being equal, the best basis for good
* Statist (London), vol. ixxxi, p. 350.
' Steps are being taken to remedy this condition. (See Commercial and Financial
Chronide, vol. loi, p. 337.)
UNITED STATES AND FOREIGN GOVERNMENT BONDS 65
credit. Of the nations under discussion, probably the United
States and Russia come the nearest to complete economic self-
sufficiency. In this respect, however, the position of the United
States is immeasurably better than that of Russia. The United
States produces within its own continental borders almost every-
thing it needs, not only in the way of food supplies, but in raw
materials for its enormous and constantly increasing industries.
Great Britain is in the weakest position in this respect. She is
obhged to import from three quarters to four fifths of her food and
a large part of her raw materials.^ France, owing to its system of
intensive farming, usually imports only a moderate amount of food.
Germany, Austria-Hungary, Italy, and Japan all have a consider-
able degree of economic self-sufficiency. The great manufacturing,
foreign commerce, shipping, and banking of Great Britain, pro-
tected by her navy, in her case have removed farming as a factor of
any significance. On account of being, however, absolutely de-
pendent on her navy even for her food supplies. Great Britain is in
a more precarious position than some of the other countries under
consideration. Throughout the nineteenth century and the open-
ing years of the twentieth, there has been a constantly increasing
development of the great nations of the world in manufacturing or
industry at the expense of farming. Great Britain, France, and
Germany particularly have developed their manufactures and in-
creased their foreign trade with the other nations of the world.
They have purchased food or raw materials from the younger and
less developed coimtries, such as the United States,^ Russia, and
Argentina, and have sold them their finished products, such as
cotton and woolen goods, iron and steel manufactures, and many
other articles required. They have also loaned largely of their ac-
cumulated capital to the countries which were in a position to fur-
nish them with food or raw materials. The extraordinary develop-
ment of the United States during the past fifty years has been
possible largely through obtaining capital from Europe — espe-
cially England. Russia has been financed for many years largely
by France.^
* See the Statisl, vol. lxxxi, p. 533.
2 Of recent years the United States, while still an enonnous producer of food and
raw materials, is coming to be more and more a manufacturing or industrial nation.
» For an interesting discussion of this subject, see Sir George Paish in the Statist,
vol. LXXXI, p. 463.
66 AMERICAN AND FOREIGN INVESTMENT BONDS
The trade or commerce of a nation shows in a broad way its
economic position. The domestic trade of the United States is
Trade many times greater than its foreign trade. The
position Bureau of Statistics, Department of Co mm erce, has
estimated our domestic commerce in 191 1 at $33,000,000,000, or
nearly ten times our foreign trade for the same year. The same
authority has estimated our domestic commerce in 1914 at $40,-
000,000,000 * made up as follows: —
Manufactures $24,000,000,000
Agricultural products 10,000,000,000
Mineral products 2,500,000,000
Fisheries 500,000,000
Value added to all this by
transportation 1,000,000,000
Imports 2,000,000,000
$40,000,000,000
This huge total largely has made possible annual savings esti-
mated at $6,720,000,000 a year.^ It shows on how broad and firm
a basis the credit of the United States rests. In a broad way, the
trade position of a nation is not merely the domestic or the foreign
commerce in merchandise, or both together, but rather the position
as debtor or creditor in toto. In other words, we must examine the
position of a nation not only as to its domestic conmierce and its
merchandise imports and exports, but also as to whether it is a
debtor or creditor in the matter of interest on securities, whether it
receives a large portion of the freight charges in international trade,
whether it receives an excess of banking or other conunissions, and
other similar considerations.
We give below table showing merchandise imports and exports,
excess of either, and total foreign trade of the principal commercial
Foreign nations of the world for the year ending December 31,
commerce 1912. We take this year in order to show fairly normal
conditions and in order to correlate the figxires with our figures of
estimated resources and debt.
' This compares with only $7,000,000,000 as the internal conunerce of the United
States in 1870. (From address of O. P. Austin, chief of the former Bureau of Statistics,
Department of Commerce, enclosed with letter from Department, May 20, 1915-)
' Statist, vol. Lxxxi, p. 608.
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68 AMERICAN AND FOREIGN INVESTMENT BONDS
On a merchandise basis, of recent years at any rate, the United
States and Russia are the only great nations that have shown a
normal excess of exports over imports. In other words, not only
Great Britain, France, and Germany, but also Austria-Hxmgary,
Italy, and Japan have shown of recent years an excess of imports
over exports.^
On the other hand, the United States and Russia have been
heavy annual debtors in the matter of interest on securities,
Invisible whcreas Great Britain, France, Holland, and probably
trade balance Germany have been creditors in this respect. The
United States has been a heavy debtor also in the matters of
freights, commissions, money sent abroad by immigrants, and
taken abroad by travelers — in fact, in almost every item which
enters into what is caUed the "invisible trade balance." Great
Britain, on the other hand, has been a creditor in all or almost all
these respects. She has had a surplus fund invested in securities all
over the world. She has done a very large percentage of the carry-
ing trade of the world and a very large proportion of its banking
business.^ In other words, while the merchandise foreign trade of
the United States has appeared to show her the largest creditor and
that of Great Britain has appeared to show her the largest debtor,
the factors in the invisible trade balance have resulted in a situation
actually very different. Great Britain and the United States offer
the two most striking examples of the interplay of foreign com-
merce and the invisible items of the trade balance. Sir George
Paish has estimated Great Britain's capital investments in foreign
and colonial countries as about $i5,ooo,ooo,cx>o.^ He has estimated
more recently that Great Britain receives from colonial and foreign
nations a total income of about $1,680,000,000 a year. On the basis
of a difference between merchandise imports and exports of, say,
* statistical Abstract for Foreign Countries (London, 1914), pp. 99-111.
* Until recently practically every transaction in American foreign exchange
amounting to $100,000 or over has gone, the writer has been told, through London.
* He gives (reduced from pounds sterling at the rate of $4.80 to the poimd): —
Total investments in Colonies, India, and foreign countries $15,320,813,800
Investments in British Colonies and India $7,450,929,600
Investments in foreign coimtries 7,860,883,200
Capital investments exceeding £50,000,000 ($340,000,000): —
In the United States $3,303,774,400
In Argentine 1,295,078400
In Brazil 453,312.000
In Mexico , 419,203,300
In Japan 257,784,000
(Jourtul djlhe Royal Statiitical Society, Jtauiuy, igii, p. 186.)
UNITED STATES AND FOREIGN GOVERNMENT BONDS 69
$625,000,000, Great Britain is able to purchase something like
$1,000,000,000 a year of securities from abroad.^ The amount of
European capital invested in what may be called permanent securi-
ties in the United States before the war has been estimated by the
National City Bank of New York — taking into consideration the
figures of Sir George Paish in 1910, the recent figures of Mr. L. F.
Loree for railroads, and the recent figures of the New York Clearing-
House for industrials — at between $5,000,000,000 and $6,500,-
000,000.^ The net payments by the United States to other coun-
tries of items entering into the invisible trade balance have beea
somewhat as follows: —
Net interest on foreign capital $250,000,000
Net balance of expenditure of American
citizens in other lands 170,000,000
Net remittances of foreign-bom citizens
to friends in Europe and elsewhere . . . 150,000,000
Net sum paid to other countries for ocean
freights 25,000,000'
Total of items owed on the invisible
trade balance $595,000,000 *"
This accoimts in a general way for the normal excess of merchan-
dise exports over imports shown by the United States. All foreign
trade must be settled finally with merchandise, services, or gold. At
any given time, however, the import or export of capital to be set-
* Statist (London), vol. LXXXi, pp. 393-94.
' Letter of National City Bank, dated July 3, 1915. — See also Economist (London),
July 17, 191S (vol. Lxxxi), p. 84. The amoimt of American securities held abroad
necessarily is a matter of opinion.
' Trade Balance of the United States (jgio), p. 191. Figures of Dr. E. E. Pratt, chief
of the Bureau of Foreign and Domestic Commerce, as given in an address at the an-
nual meeting of the California Bankers' Association, San Francisco, May 27, 1915,
gave the total estimated debt of the United States to Europe as $7,000,000,000 owing
principally to the following coimtries: —
England $4,000,000,000
France 1,000,000,000
Germany 1,250,000,000
Holland 650,000,000
Dr. Pratt estimated: —
Net interest on securities $300,000,000
Tourist expenditures 250,000,000
Remittances to friends 150,000,000
Freights 50,000,000
Total $750,000,000
For the fiscal year ending June 30, 1914, Dr. Pratt estimated that we had to make
payments to Europe amoimting to $55,000,000 more than the total amount of mer-
chandise exported.
70 AMERICAN AND FOREIGN INVESTMENT BONDS
tied with securities may play a large part. The great lending coiin-
tries have been Great Britain, France, Holland, Germany, Belgium,
and Switzerland. Of these countries Great Britain has been by far
the most important lender, with, as stated above, foreign invest-
ments in the neighborhood of $15,000,000,000. Germany and
France come next with investments of, say, about $8,000,000,000
each.^ The investments of HoUand, Belgium, and Switzerland are
of much smaller amount, but are nevertheless considerable. The
merchandise imports of all these five coimtries largely exceed their
exports in consequence of receipt of interest and of tourist expendi-
tures. In the case of Great Britain, excess is paid for further by the
earnings of British ships, the toimage of which forms such a large
part of the world's international shipping facilities.* A large excess
of merchandise imports over exports usually indicates that a coim-
try is in a position to receive a large amount of interest on capital
invested in other countries; a large excess of exports over imports
usually indicates that a country is forced to pay heavy simis in
interest and dividends on its securities owned abroad. Sometimes
an excess of merchandise imports over exports means the import of
capital in the form of merchandise to be paid for with securities.
The amount of American securities held abroad has been consider-
ably reduced since the opening of the great war, though probably
not to the extent that many accounts would lead one to believe.'
' These facts should be borne in mind in estimating the ability of these nations to
pay for the costliest war in history.
' Trade Balance of the United Stales (igio), pp. 169-70.
' A letter received from the National City Bank of New York, July 3, 19x5, sti-
mates the amount of American securities repurchased from abroad since the beginning
of the war at between $300,000,000 and $500,000,000. There has also been purchased
in this coimtry a considerable amount of foreign government securities.
We give below a list of loans to foreign nations raised in the United States from the
beginning of the war up to October 23, 1915: —
Russian Government acceptances $25,000,000
French Government one-year notes 10,000,000
French one-year 5% loan 50,000,000
Dominion of Canada 5% one- and two-year notes 40,000,000
Canadian Provincial and municipal loans 85,500,000
Gennan nine-months 5% notes 10,000,000
Swedish Government two-year notes 5,000,000
Argentine National one-three-year loan 15,000,000
Argentine five-year 6% bonds 25,000,000
Norway short-term loan 3,000,000
Bolivian loan j ,000,000
Republic of Panama thirty-year 5 per cents 3,ooo'ooo
Swiss Government one-five-year notes 15,000,000
Anglo-French five-year 5% loan 500,000,000
Italian one-year 6% notes 25,000,000
Total $812 500 000
(Slalisl [London], vol. utxxv, pp. 65 and 180.)
UNITED STATES AND FOREIGN GOVERNMENT BONDS 7I
The United States also has purchased considerable amounts of
foreign securities.
All these naatters have an important bearing on the economic
and financial status of a nation and therefore on its credit. The
present war may change appreciably the relative rank „. . ^
of the great nations of the world. We will sketch theieading
briefly their situation as it appears to-day.
The United States, in the size and character of its territory and
population, in the stability of its government, and in its general
pohtical, commercial, and financial strength, holds .
to-day an almost unique position. It has the almost the United
unparalleled advantage of having been settled by a
vigorous and intelligent population, possessed of all the knowledge
of Europe at tJie time of settlement and then placed in possession
of a vast territory with resources practically untouched. The devel-
opment of these resources by such a population has brought the
United States to its present commanding position. The opening of
the Panama Canal, the new banking system, improved relations
with South America, and the great war have given the United
States an opportunity that comes to few nations at any time. Un-
less the unforeseen happens, it is even more favorable than the
situation of Great Britain after the Napoleonic wars; for the United
States has one great advantage which was conspicuously absent in
the case of Great Britain at that time — an exceedingly small
national debt. The United States, moreover, not only is now ex-
porting an excess of merchandise of something like $1,000,000,000
a year (June 30, 1915), — which on such a scale as this is a tempo-
rary state of affairs, — but is in a position to increase greatly its
permanent or normal foreign trade. This is often the forerunner of
a commanding financial position.^ The weak point in the economic
situation of the United States is the lack of an adequate merchant
marine. This should be remedied. With her enormous farming and
manufacturipg interests, — greater than those of any other coun-
try, — the United States is in a fair way to become the leading
commercial and financial nation of the world. From almost any
angle that one looks at it, this country is entitled to credit as high
as that of any nation in the world.
' See George J. Goschen, The Theory of the Foreign Exchanges (London, 1896),
pp. 32-35-
72 AMERICAN AND FOREIGN INVESTMENT BONDS
During the past one hundred years, Great Britain has been con-
sidered, on the whole, the leading civilized nation in the world.
. After the Seven Years' War in Europe and the French-
and-Indian War in America, England became pre-
dominant in the New World. By the final defeat of Napoleon, she
established herself as the first nation in Europe. In a broad way
this is the reason why British consols have sold for most of this
period higher than the bonds of any other Government. As indi-
cated earlier, however, the economic and political position of Great
Britain to-day is by no means secure. On account of being abso-
lutely dependent on her navy for the maintenance of her great
position in the world, Great Britain is in a precarious and at times
dangerous position. A serious impairment of her naval power
might lead to the breaking-up of the British Empire as at present
composed. The English-speaking, self-governing dominions, such
as Canada, Australia, and South Africa, probably would grow in
power and might remain strongly attached by ties of affection to
the mother country; but the center of gravity of the Empire would
be shifted.
France in the early part of the eighteenth century was the first
nation in Europe. In population, wealth, power, and prestige she
clearly led all other nations. The long revolutionary
wars of France, however, and her final defeat by the
Allies left her greatly weakened. She never again recovered her
leading position; but ia the thirty or forty years preceding the war
of 1870 she showed a notable expansion in industry and wealth.
With the halting of her own development after the war with Prus-
sia, France became one of the principal lending nations of Europe.
The French people have been exceedingly saving, and have not
only made possible the wide distribution of French rentes in
France, but the lending of large smns to Russia and other foreign
countries. Since 1870, France has succeeded in building up a very
respectable Colonial empire.
Germany has shown an extraordinary growth in popvdation and
wealth during the past forty years. She has not only made herself
German *^^ Strongest single military power in Europe, but has
developed her industries and her foreign trade to a
point which threatened the supremacy of England. This extraor-
XJNITED STATES AND FOREIGN GOVERNMENT BONDS 73
dinary development made necessary also efforts toward outside
expansion. The pressure of population in Germany probably has
been greater than anywhere else, except possibly in Japan. ^ Ger-
many's burdens for mihtary preparation have been great. Her
colossal policies of expansion by force — sometimes described as
Pan-Germanism ^ — have placed her in a precarious position.
During the present war, she has not only increased enormously the
burden of her debts, but has alienated to a large extent the friend-
ship of the rest of the world. This cannot but react imfavorably
on her credit.
Italy and Austria-Hungary are relatively poor countries with
heavy burdens of taxation and heavy debts. The financial condi-
tion of each at many times has been precarious.* itaiy, Austria-
Italy is making strenuous efforts to extend her bound- R^laTnd
aries at the expense of Austria — particularly in what J^p^°
are called " the unredeemed provinces," which include Trent and a
portion of the eastern shores of the Adriatic. Russia is a country
continental in area with by far the largest population of all the
great powers. The resources of the country, however, are largely
undeveloped, the railways are comparatively few, and the general
economic and financial condition leaves great room for improve-
ment. Her army has been to her a considerable burden.* Owing to
her great resources, even though they are now undeveloped,
Russia probably will be able to take care of her debts. Japan is a
coimtry in which the best part of the population devotes itself to
military pursuits. Business is regarded as a means to an end and
business men as inferior to the military class. Japan has a large
population for the size of its territory and the scantiness of its
resources. Unless it can find and develop in Korea, and perhaps in
China, a wealth that will enable it to become a rich and powerful
industrial nation, "it cannot hope to satisfy its national ambitions
to say nothing of its European creditors." ^
' Statistical Abstract for Foreign Countries (London, 1914), pp. S-ii.
^ According to Professor Usher, the German dream of to-day has been the estab-
Kshment of an empire comprising Germany, Holland, Belgium, Denmark, Switzer-
land, Italy, Austria-Hungary, the Balkans, Turkey, and Asia Minor — a new world
state bounded by the North Sea, the Baltic, the Persian Gulf, and the Mediterranean.
(American Review of Reviews, November, 1914, p. 616.)
' Economist (London), vol. Lxxix, p. 874, and vol. lxxx, p. 56. Statist (London),
vol. Lxxxi, pp. 158-59, 349-50, and 552.
* Statist (London), vol. lxxxi, p. 530. ' Economist (London), vol. lxxx, p. 671,
74 AMERICAN AND FOREIGN INVESTMENT BONDS
We have discussed in a general way the credit of the leading civ-
ilized nations of the world. We have gone into the leading factors
Prices of making up their credit under what may be called
foTs'an/of" normal conditions. Before discussing the bearing of
French rentes ^jjg present great war on national credit, we wish to
give an idea of the course of prices of some of the leading govern-
ment bonds for a series of years. Since the close of the eighteenth
century, the credit of Great Britain has been most of the time
higher than that of any other nation. France for most of the time
has held second position — though at times French credit has been
strained severely. The accompanying table (on page 75) shows
the highest and lowest prices by ten-year periods for a long series of
years of British consols, and French rentes.
An examination of these prices makes one feel that government
bonds should be thought of more as one thinks of stocks — that is,
as being liable to great fluctuations. In fact, the common European
name for government securities is stocks. We should think of these
securities, especially as there is no legal means of enforcing pay-
ment, as fluctuating with the position and prosperity of the nation
almost as much as does the common stock of a railroad or an indus-
trial concern. This may seem an extreme statement; but the record
of national good faith and the fluctuation in the prices of govern-
ment securities make it entirely reasonable.
Still more will this appear when we extend our investigations to
the prices of government bonds other than English and French.
Prices of The accompanjdng table (on page 77) shows the high-
omnent^bonds, ^st and lowest prices on an income basis for ten-year
1873-1912 periods, mostly siace 1873, of United States bonds,
British consols, French rentes, Prussian consols, Italian, Austrian,
Russian, and Japanese bonds.
In discussing the debt histories of the individual nations, we
have referred at times to the prices of their bonds. It is not always
possible to correlate closely the prices of govenmient bonds with
the condition of the national finances or with historical events of
favorable or unfavorable import. The effect of such matters on
prices for a series of years is modified by general economic or finan-
cial conditions, by the relation between supply and demand for a
country's securities, and by other considerations. It must be borne
UNITED STATES AND FOREIGN GOVERNMENT BONDS 75
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'jS AMERICAN AND FOREIGN INVESTMENT BONDS
in mind that, aside from and before the great war, there have been
certain factors during the past twelve or fifteen years which have
led to an almost steady decline in the prices of aU low interest-
bearing securities. Among these factors may be mentioned the
increase in the production of gold, the increase in the cost of living
and in the scale of living, and the output of enormous amounts of
securities of all kinds coincident with rapid industrial expansion
and private and public extravagance. The lowest price of British
consols during the past one himdred years was, however, in June,
1815, at the time of the battle of Waterloo; the highest was on July
I, 1896, at a time when England's supremacy in almost every
respect was unquestioned and when there was a relatively large
accumulation of capital in Europe seeking investment. The lowest
price for French rentes since the close of the Napoleonic wars
occurred ia the troublous days of the Second Republic (1848), and
the next lowest was after Sedan; the highest price was in 1897,
when France and the world were at peace and capital was seek-
ing investment aU over the world. The lowest prices for United
States bonds since the early days of the Republic were in the spring
and early summer of 1861 at the beginning of the Civil War; the
highest prices as a rule were in 1902, when the United States had
greatly extended its territory as a result of the Spanish War, was
in a strong economic and financial condition, and when there was
a large accumulation of capital seeking investment.
It remains only to discuss, as far as it can be seen, the effect of
the present great war on national credit. In niunber of men en-
Estimated gaged, population and resources of nations at war,
^^ISm of and total expenditure, the present war is in a class by
presentwar \\s,eii. Ancarly estimate of the Loudou "Economist"^
placed the direct total cost of this war for six months for the
leading coimtries at about $8,232,000,000, divided somewhat as
follows: —
Germany about $2,040,000,000
Austria-Hungary " 1,440,000,000
Russia " 2,040,000,000
France " 1,560,000,000
Great Britain " 1,152,000,000
» Vol. Lxxx, pp. 50-51.
UNITED STATES AND FOREIGN GOVERNMENT BONDS ^J
These figures were at the rate of about $16,464,000,000 as the
total direct cost of the war for the nations listed for one year. Mr,
Edgar Crammond, Secretary of the Liverpool Stock Exchange, at a
PRICES OF GOVERNMENT BONDS*
Securily
United States
6%i88i
4% 1907
4%i<)ci7
4%I92S
Great Britain
Consols 3%
Consols 2}%
Consols 2!%
Consols 2i%»
France
Rentess%
RenteS3%
Rentes 3%
Rentes3%
Germany*
Prussian consols 4% ,
Prussian consols 4%
Prussian consols 4% '.
Prussian consols 3i% .
Italy
Rentes s% '
Rentes 5%'
Rentes 5%'
Rentes 3i%-34%»...
Austria-Hungary
Austrian rentes 4%. . .
Austrian rentes 4% . . .
Austrian rentes 4%- . .
Austrian rentes 4%. . .
Russia
Nicolai 4%
Nicolai 4%
Railroad 4%
Rentes 4%
Japan
Sterling 4) % (ist series)
Period
1873-1882
1883-1892
x8g3-zgo2
1903-1912
1873-1882
1883-1892
1893-1902
1903-1912
1873-1882
1883-1892
1893-1902
1903-1912
1873-1882
1883-1892
1893-1902
1903-1912
1873-1882
1883-1892
1893-1902
1903-1912
lS73-l882>»
1883-1892
1893-1902
1903-1912
1873-1882
1883-1892
1893-1902
1903-1912
High
a.08%
I.S8%
1-93%
a-95%
2.53%
1-95%
2.66%
4.24%
3.03%
2.86%
2.98%
3.88%
3.76%
3-79%
3.48%
4.70%
4.36%
3-94%
3.84%
4.85%
4.14%
3.81%
3.93%
4.64%
4.06%
3.76%
3-99%
4.83%
Dale
June 16, 1876
March 29,1889
March 14, 1902
October 13,1905
May 24, z88i
March 29, 18S8
July 1, 1896
anuaxy 5, 1903
May 14, 1881
SeptemDer i3» 1892
July 22, 1897
January 12, 1903
1881
December 7, 1888
June 17, 1893
April 17, 1903
June 8, 1881
December 3, 1886
December 24, 1902
June 1, 1905
May 9, 1881
September 30, 1892
September 6, 1897
June 26, 1903
September 21, 1S75
Feoniary 13, 1891
August 18, 1896
June 2, 1903
April, 19x0
Low
Date
4.50%
s.94%
3-39%
2.80%
3.34%
2.95%
3.03%
3.45%
4.95%
4.05%
3.20%
3-40%
4.13%
4.09%
3.86%
4.13%
7.80%
5.08%
6.05%
3.86%
6.11%
5.05%
4.30%
4.71%
6.49%
5.48%
4.28%
S.89%
October 17, 1873
June 23, 18S4
August 7, i8g6
June 15, 1910
December, 1874
November 14, 1890
July IS, 1901
October 14, igi2
May 18, 1877
December 17, 1883
January 4, 1893
October 8, 1912
October 2, 1900
December 19, igx2
1873
January 23, 1883
January 18, 1894
May 3, 1912
June 17, 1879
January 5, 1883
November 13, 1893
October s, 1912
April 23, 1877
January 13, 1883
January 11, 1893
August 19, 1907
6.10% October, 1907
' Highest and lowest prices for United States bonds taken from the Financial Review (New York, 1914},
pp. 83 to 87, and from the Commercial and Financial Chronicle (New York), vol. xvn, p. 621, vol. xxiv, p.
5, vol. xxxvm, p. 757, vol. XLVin, p. 421, vol. Lxm, p. 217, vol. lxxiv, p. 562, vol. ucxxi, p. 1154, vol.
LXXXX, p. 1596.
Highest and lowest prices and yields for foreign government bonds, except Japanese, furnished by
Messrs. F. C. Mathieson & Sons, London, England.
Highest and lowest prices for Japanese government bonds from the Financial Renew (New York, 19x2),
p. 8x.
' Allowing for loss if redeemed at due date (X923) at par and for reduction of mterest in X903.
■ 2i% from April, X903.
* In view of the fact that the credit of Prussia and of the German Empire has been very much the same,
and that reliable quotations for Prussian securities covering a fairly long period are more easily obtainable
than for German imperial bonds, we have used the Prussian consols table.
» Prices from x88o to 1882 only. • From 1898^}%.
' S% less 13.20% of income tax,
' 3i% from January, 19x2.
S%I
1° 1879 to 1882 only.
t income tax.
78 AMERICAN AND FOREIGN INVESTMENT BONDS
meeting of the Royal Statistical Society, March i6, 1915, esti-
mated the direct costs for one fuU year of war as follows:^
Great Britain about $3,398,400,000
France " 2,656,320,000
Germany " 4,502,400,000
Austria-Hungary " 2,697,600,000
Russia " 2,880,000,000
These figures show a total direct cost for one year of war to
the leading nations involved of $16,134,720,000. The London
"Statist" ^ has given the probable cost of the first twelve months
of war for Great Britain as about $3,192,000,000. The cost of the
first twelve months of war for France probably will be in the neigh-
borhood of $3,500,000,000.^ Perhaps it is not far wrong to say that
the cost of the war for the first twelve months to the leading na-
tions involved will be in the neighborhood of from $16,000,000,000
to $17,000,000,000. The figures probably need not be modified
much from the above to take care of the short participation of
Italy during the period covered. The costs have been steadily
rising, however, until the latest estimates for Great Britain — by
Premier Asquith, September 15, 1915 — figure out a net war ex-
penditure, exclusive of loans to allies and certain other items, of
about $16,800,000 a day, or at the rate of $6,132,000,000 a year,
and a gross war expenditure, including loans to her aUies, of about
$20,160,000 a day, or say $7,358,400,000 a year; * the monthly war
costs of France, according to the French Budget Commission, have
been running at the rate of about $397,440,000 a month, or say
$4,769,280,000 a year, and the vote of credit, asked by M. Ribot
September 16 for the last quarter of 1915, was substantially on this
basis; ^ the average monthly cost to Russia is given by M. Ribot,
speaking on the same date, as about $345,600,000, or at the
rate of $4,147,200,000 a year;' the monthly war expenditures
^ Journal of the Royal Statistical Society (London), vol. Lxxvni (May, 1915),
pp. 361-413.
' Vol. Lxxxiv, p. 664. For later figures, see vol. rxxxv, p. 99 (about $3,600,000,000).
' Commercial and Financial Chronicle (New York), June 26, 1915, p. 2117. See also
statement of M. Ribot as siunmarized in the Statist (London), June s, iQiS, vol.
LXXXIV, p. S7I.
* Statist (London), September 18, 1915, vol. Lxxxv, p. 447.
s Commercial and Financial Chronicle (New York), September 2$, 1915, vol. loz,
p. 969 and Ibid., September 18, 1915, p. 877.
• Commercial and Financial Chronicle (New York), vol. loi, p. 877.
UNITED STATES AND FOREIGN GOVERNMENT BONDS 79
of Germany, according to Herr Helfferich, Secretary of the Im-
perial Treasury, in his speech introducing the third war loan
August 20, 1915, amoimt to about $472,coo,cxx), or at the rate of
say $5,664,000,000 a year.^ The same authority estimates the
costs to all the nations involved at nearly $70,800,000 daily, over
$1,888,000,000 monthly, and about $23,600,000,000 yearly.^ Allow-
ing for the participation of Bulgaria — which occurred after Herr
Helfferich 's estimate — and possibly other nations, the cost of the
second year of war to aU the nations involved is likely to be in the
neighborhood of $25,000,000,000.
These figures compare with the estimated cost of previous wars
somewhat as shown in the table on page 80.*
To this we may add about $16,500,000,000 as the cost of the first
year of the present war and perhaps $25,000,000,000 as the cost of
a second year.
In addition to the direct cost of maintaining armies and carrying
on war, there is the economic loss through cessation of production.
This has been estimated by M. Guyot and the London "Econo-
mist " for the first six months of the war as about $10,272,000,000,*
or at the rate of $20,544,000,000 a year. Adding this to the direct
cost, we get a figure for the first year of the war of about $37,000,-
000,000. If we allow for the value of lost lives, on the
,.,___ ,- ,, Jk,, . Total losses of
basis of M. Guyot s figures (about $4,646,400,000 for the war to
six months), we find total losses for a year of over
$46,000,000,000. This is "without allowing for the devastation and
widespread destruction of fixed capital." * The total losses to July
31, 1915, as estimated by Mr. Crammond, are as follows: —
Great Britain $6,038,400,000
Germany 13,320,000,000
Belgium, including destruction of property. . . 2,527,200,000
France, including destruction of property. . . 8,094,720,000
Austria-Hungary, iacluding destruction of
property 7,622,400,000
Russia, including destruction of property . . . 7,219,200,000
A total for the six nations of about $44,821,920,000*
» Economist (London), September 4, 1915, vol. lxxxi, p. 358. ' Ibid., p. 360.
' World Almanac (1915), p. 488. See also Mulliall (1899), p. 586, and Whitaker's
Almanack (1915), p. 800. All such figures should be thought of as approximations only.
* Economist (London), vol. lxxx, p. 51- ' Ibid., p. 51.
• Journal of the Royal Statistical Society, May, 1915, pp. 361-413. For another est!-
8o AMERICAN AND FOREIGN INVESTMENT BONDS
The "Economist" estimated the direct costs to all the nations
involved as about 43% and the total costs as about 96% of the
national income or earnings. Strictly speaking, total loss occa-
sioned by a war like the present one is incalculable. Such things
cannot properly be measured in figures. It should be borne in
mind that a very large part of the cost of war is represented by
expenditures of the entire nation through the Government; and
GROSS COST OF PAST WARS FROM 1 793-1913 — PUBLIC
FIGURES '
Dates
Countries engaged
Cost
1793-1815....
1812-181S
1828
England and France
France and Russia
Russia and Turkey
Spain and Portugal (dvil)
France and Algeria
Revolts in Europe
England
France
Sardinia and Turkey
Austria
Russia
France
Austria
Italy
United States (dvil war)
Denmark, Prussia and Austria
Prussia and Austria
Brazil, Argentina and Paiagtiay
France and Mexico
France
Germany
Russia
Turkey
Spain and United States
England and Transvaal
Russia and Japan
Italy and Turkey
Balkan Wars
$6,250,000,000
450,625,000
100,000,000
250,000,000
190,000,000
1830-1840
1830-1847
1848
1854-1856
tRco
371,000,000
332,000,000
128,000,000
68,600,000
800,000,000
75,000,000
127,000,000
51,000,000
5,000,000,000
36,000,000
1861-1865....
1864
1866
.^^0,000,000
1864-1870
1865-1866....
1870-1871
1876-1877....
1898
240,000,000
65,000,000
1,580,000,000
954,000,000
806,547,489
403,273,74s
1,165,000,000
1900-1901
1904-1905....
1911
1,000,100,000
2,500,000,000
700,000,000
1912-1913 —
1,192,130,000
Expense of wars, 1790-1860 $9,243,225,000
Expense of wars, 1861-1913 15,972,051,234
Total ^ $25,215,276,234
mate of the direct costs and total losses, see Charles F. Speare, "What the War is
Costing Europe," American Revienu of Reviews, April, 1915, p. 452.
* In the case of the Balkan Wars, estimates are from bankers' statements. (See
World Almanac, p. 488.)
UNITED STATES AND FOREIGN GOVERNMENT BONDS 8l
that a great portion of this would be incurred in times of peace by
the nation as individuals.^ In other words, a large part of the cost
of war, instead of being a true addition to expenditure, is merely a
transference of expenditure from individuals to the Government.
On the other hand, the activities of individuals in war are destruc-
tive, whereas in peace they are or should be constructive. Again,
during and after a great war the people are induced to practice
economies which in ordinary times they would be likely to neglect.
Taking a still larger view, there is often a physical and moral regen-
eration brought about by the occurrence of a terrible war. So it
will not do to assume that war is all waste — that the " cost" is all
loss. The population of Germany in the Thirty Years' War was
reduced from about 16,000,000 to about 4,000,000.^ Before the
present war it was probably 70,000,000. The greatest prosperity
of England developed after the Napoleonic wars. So also it was
with our own American Civil War. There is a regeneration that
nature provides. Wounds heal — as a rule they can hardly be
prevented from healing. The grass that is burned in the early
spring is replaced with new grass greener and more lovely. So
economists have figured out how the great losses of the present
war ultimately may be replaced. They will constitute a serious
burden and a serious problem, however, for many years to
come.
The direct costs of the war have been financed largely through
borrowings. Undoubtedly a large amount of paper
money has been issued — the convertibility of some of
which remains to be proved. The war debts,' according to the
1 For an interesting article on these phases of the cost of the war, see Roland
G. Usher, " The Cost of the War," in the Atlantic Monthly, June, 1915, p. 847.
' Price Collier, Germany and the Germans, p. 30.
' The Boston Evening News Bureau, September 20, 1915, has given the war debts,
exclusive of bank loans, as follows:*
ALLIED LOANS
Great Britain —
3i per cents at 95 on 3-97% basis $1,750,000,000
4i per cents on 4-SS% basis (new loan) 2,925,000,000
Treasury bills, ij% io 3j% 70o,ooo,ooot
Five-year Exchequer 3 per cents 239,000,000
Canadian ten-year 4^ per cents in London 25,000,000
Canadian one- and two-year s i)er cents in New York 45,000,000
Indian Government 4% domestic loan 15,000,000
Anglo-French loan in the United States 250,000,000
Total $5,949,000,000
* This list of loans has been corrected from other sources to October 23, 19x5.
t Estimated.
82 AMERICAN AND FOREIGN INVESTMENT BONDS
London "Statist" of October 23, 1915 (vol. lxxxvi, pp. 182-86),
up to about that time, were as follows: —
WAR DEBT*
Great Britain —
November, 1914, s\% war loan $1,680,000,000
March, 1915, 3% exchequer bonds, net 161,280,000
July, 191S, 4^% war loan 2,808,000,000
October, 1915, S% American loan 250,000,000
Treasury bills 1,027,200,000
Total war debt $5,926,480,000
Prance —
NsLtional defense bonds $i,230,ooo,c»o
Treasury bonds 450,000,000
One-year 5 % notes in London 50,000,000
One-year 5% notes in New York 30,ooo,ooot
Collateral loan in New York 43,000,000
Credit in New York (1914) 10,000,000
Credit in New York (igis) so,ooo,ooo
Anglo-French loan in the United States 250,000,000
Total $2,083,000/300
Russia —
S per cents at g4 on 5.35% basis $257,500,000
Second internal loan 257,500,000
Third internal loan five-year si per cents 515,000,000
Four percent bonds - 309,000,000
Treasury bilk 979.500,000
Issues in England and France 277,000,000
Total $2,595,500,000
/W51 —
Twenty-five-year 4} per cents $200,000,000
Twenty-five-year 4! per cents at 05 190,000,000
(tee-yeai notes (United States) 6% 25,000,000
Total $415,000,000
Grand total Allied loans $11,042,500,000
GERMAN AND AUSTRIAN U)ANS
Germany —
First war loan, s per cents at 97) on 5.32% basis $1,115,000,000
Second loan, s per cents at 98^ 2,265.000,000
Third loan at 99 ^ 3,000,000,000
Nine months' notes in United States ro,ooo,ooo
Total $6,390,000,000
Auslria-Bungary —
Austrian si per cents at 97i on 6.10% baas $433,000,000
Hungarian 6 per cents at g7i on 6.70% basis 237,000,000
Second war loan to June 25 900,000,000
Loan from German bankers 76,000,000
Second loan in Germany 125,000,000
Credit in Germany 60.000,000
Total $1,831,000,000
Tttrkey —
Loan in Germany $250,000,000
Total of German loans $8,471,000,000
Grand total of all belligerent loans $19,513,500,000
* Reduced at the rate of $4.80 to the pound sterling,
t Estimated.
(For third German loan, see Commercial and Financial Chronicle [New York], vol. loi, p. 1055,
and for Italian 6% loan, see ibid.f p. 1327.)
UNITED STATES AND FOREIGN GOVERNMENT BONDS 83
Trance —
Advances from the Bank of France $1,344,000,000
French treasury bonds discounted by Bank of France in order to
make advances to foreign Governments 101,760,000
3i% loan of July, 1914 96,000,000
Bon de la Defense Nationale 1,511,232,000
Obligation de la Defense Nationale 430,272,000
Loan from England 240,000,000
Loan from America 250,000,000
Total sum borrowed by France for the war $3,973,264,000
Russia —
5% short-term treasury bonds placed with State Bank $1,294,363,000
S% long-term loans 1,013,200,000
Short-term bonds placed in England 253,300,000
Short-term bonds placed in France 316,625,000
Treasury bills, etc 668,712,000
Total $3,546,200,000
Italy —
December, 1914, 4^% loan $192,000,000
July, 1915, 5% loan 192,000,000
Loan from Bank of Italy 233>S93,2oo
Total war debt $617,539,200
Germany —
September, 1914, 5% war stock $824,112,000
September, 1914, 5% treasury bonds 236,000,000
February, 1915, 5% war stock 2,148,308,000
September, 1915, 5% war loan 2,855,836,000
Treasury bills (approximate) 1,015,744,000
Total war credit obtained $7,080,000,000
Austria^Bungary —
November, 1914, 1st Austrian sWo war loan $459,998,400
Valuta loan from Germany 72,000,000
November, 1914, Hungarian 6% war loan 234,000,000
May, 1915, 2d Austrian war loan 555,998,400
June, 1915, 2d Hungarian war loan 224,798,400
June, 1915, 2d loan from German bankers 73,200,000
Total publicly issued debt $1,619,995,200
Estimated floating debt 1,022400,000
Estimated total to September 30 $2,642,395,200
These figures show total war loans for the Allies of $14,063,-
483,200 and for Germany and Austria-Hungary of $9,722,395,200,
or a total of $23,785,878,400, The figures include advances by the
84 AMERICAN AND FOREIGN INVESTMENT BONDS
great central banks to the Governments for war purposes. France
and Russia particularly have financed their war costs to a great
extent through the central banks. As in the war of 1870, France
has leaned heavily on the Bank of France.*
It is hardly worth while to attempt to make any definite state-
ments as to the total present debts of the leading nations engaged in
this war. When the war is ended, it will be possible to figure with
some accuracy the net additions to the various national debts, to
figure the debts per capita, and to estimate the proportion between
total debts and wealth and between debt charges and national
income. Sufl&ce it to say, that already, in October, 1915, the na-
tional debts of the principal belligerents as a whole probably have
doubled.* The debts of some of the nations at war have more than
doubled. Chancellor of the Exchequer McKenna in introducing
the budget estimated the dead-weight debt of the United Kingdom
March 31, 1916, as likely to be £2,200,000,000 ($10,560,000,000).'
This would be an increase of over two hundred per cent above the
debt in 191 2. The debt of Germany akeady has received an addi-
tion of 30,000,000,000 marks* (October, 1915), or say $7,080,000,-
000 — a war increase alone over our figures for 1912 of about one
hundred and forty-five per cent. All these great increases in debt,
of course, are for what have been called unproductive purposes
— that is, for war. The war loans constitute a staggering addition
to the dead-weight debts of the nations concerned.^
How heavy will be the burdens of these huge debts after the war
will depend in large measure on the terms of peace and on the
Possible basis course the indebted nations pursue after the war.
of peace ^g .^^jy jjq^ jjgjg discuss the various suggested terms
' For figures of bank-note expansion, gold-holdings, and assets and liabilities of the
banks, see the Statist, October 23, 1915, vol. Lxxxvi, pp. 182-86. In France, Germany,
and Russia the convertibility of the paper currency has been suspended. {Economist
[London], July 10, 1915, vol. Lxxxi, p. 47.)
' The loans of the nations at war from the beginning of the Balkan wars, October 8,
1912, up to the outbreak of the European war, July 30, 1914, were, according to the
Boston News Bureau, $830,000,000. Of this Germany and Austria borrowed $489,-
000,000 and France, Servia, and Belgiimi $341,000,000. {Boston News Bureau,
October 9, 1914.)
' Economist (London), vol. Lxxxt, p. 463. • Ihid., p. 358.
' The net debt of the United States August 31, 1915, was $1,119,376,669 — or
$92,690,643 more than in 1912. {Commercial and Financial Chronicle [New York],
vol. loi, p. 989.)
UNITED STATES AND FOREIGN GOVERNMENT BONDS 85
of peace — such as the restoration of Alsace-Lorraine, the creation
of an autonomous Poland and other matters of this kind. What-
ever indemnities are paid will add just so much to the burden of the
nation or nations paying them and take away just so much from
the burdens of the nations receiving them. So also will any losses
or acquisitions of territory increase or lessen the burdens of the
debts. From a financial point of view, what is essential, however, is
that the peace shall be, as far as possible, lasting, — that it shall
make impossible a recurrence in the near future of any such catas-
trophe as we are witnessing. Otherwise discussion of national
solvency is a waste of time. In order to make a lasting peace, it
would seem that boundaries should be rectified on the basis of
nationalities or, perhaps we may say, of races. In this connection
there are many questions to be settled involving the present do-
minions of Austria-Hungary. Let us hope that there will be no
effort to crush any nation or people — even though that nation
temporarily may have offended against all the laws of civilization.
Yet no peace will be a peace unless so-called militarism is done
away with. Expenses for military preparation must be reduced
largely and the energies of mankind devoted to productive pur-
poses. All sorts of programmes have been suggested — including
that of a United States of Europe with an international military
and naval force to maintain order and enforce peace. ^ Undoubt-
edly, with the backing of the laboring classes and the Sociahsts
in many countries, a tremendous effort will be made to bring about
the settlement of as many disputes as possible through arbitration.
There will be also — it is evident already — a tremendous move-
ment toward democracy and liberal institutions.^ Some such solu-
tion would seem to be essential to continued national solvency and
national good faith.
If Baxter in 1874 was alarmed at the rate at which nations were
borrowing and feared then for the solvency of some of them,' what
* Dr. Nicholas Murray Butler in the Boston Sunday Herald, October 18, 1914, and
meeting of the League of Peace in Independence Hall, Friday, June 17, 1915. {Boston
Evening Transcript, ]\xa.eiy, igis-) See also Society to Eliminate Economic Causes
of War. (Commercial and Financial Chronicle [New York], vol. 100, p. 2134.)
2 The immunity of private property at sea in time of war, or even the neutralization
of all conmierce, are subjects of great interest and importance. (See the Evening Post,
New York, August 10, ipiS-)
• Journal oj the Royal Statistical Society, vol. xxxvn, pp. 11-13.
86 AMERICAN AND FOREIGN INVESTMENT BONDS
shall we say in 1915 with debts piling up at unheard-of rates and
(juced e ^^^ ^^^ ^^'^ ^°^ ^^^ ^^ Sight? ^ It is hard to escape
penditures the couclusion that after the war most of the nations
for national engaged will be forced either (i) to reduce their ex-
so venqy penses f or armaments materially in order to pay inter-
est on their debts or (2) to compromise or repudiate at least a portion
of their obligations. The debt histories which we have given show
that such things are not unheard of. There has been during the past
one hundred years, of course, an enormous increase in the wealth
of the leading nations at war. For instance, the burden of the Brit-
ish debt, on the basis of debt to wealth, even with the great addi-
tions to date for war, is less than one third as great as in 1816.
Great Britain could fight between three and four years more with-
out making her debt bear a larger proportion to her resources than
it did after the Napoleonic wars.^ At the same time there is a limit.
There is less reason to think that her resources will increase at the
rate they did in the earlier period. We can apply the same sort of
tests to the other nations at war. Then there is another considera-
tion. Whenever there is a crushing burden of debt or of taxation, —
especially if those burdens have failed to produce any correspond-
ing benefit, — the temptation to compromise is very strong. It is
then that the stuff of which nations are made is revealed. Con-
tinued expenditures for military purposes at the rate which has
prevailed during the past thirty years,' however, added to the
charges on the debts created through this war, are likely to lead to
bankruptcy. It is a grave question, of course, whether in the cases
of some nations bankruptcy can be avoided under any drcum-
stances.
We will not undertake to estimate the relative credit and stand-
ing of the various nations after the war. Such a task is impossible
until one sees more clearly what the outcome of the war is to be.
' Some decisive military action, inability to borrow, inability to pay interest on
existing debts, or general economic exhaustion may bring the war to an end.
* For an interesting article on this phase of the subject, see " Will the War Bankrupt
Europe?" in the North American Review, August, 1915, p. 174.
' Between 1881 and 1911, the combined annual expenditure for army and navy
of the five great European nations — Great Britain, France, Germany, Austria-
Hungary, and Russia — much more than doubled, showing a far higher rate of in-
crease than the respective national incomes. {Economist [London], vol. lxxdc, pp.
SS6 and 914.)
. UNITED STATES AND FOREIGN GOVERNMENT BONDS 87
It would seem, however, that the United States, Russia, and Japan
would emerge from the war relatively less weakened
than any other nations. The United States and Rus- nations after
sia, on account of the continental nature of their *^"
territory, the size and character of their population, and the im-
mensity of their resources, developed and undeveloped, are in an
enviable position. Japan has not been placed under the burdens
that some of the other nations have been; and it may succeed in
developing its material interests in Korea and China on a scale
which will greatly enhance its credit. It is a law of nature never
violated that the leadership of nations goes to the strongest — that
is, the strongest in a broad sense. Is it too much to expect that the
United States after the war will be in a position to assume the
leadership which has been held for a hundred years by Great
Britain?
Until the effect of the present war on the debts and financial
condition of the nations engaged becomes clearer, American inves-
tors should exercise great care in the purchase of Proper attitude
foreign government bonds. Mr. Mortimer L. Schiff, °^ American in-
Ti 1 -KT tr 1 1 1 • 1 • vestors toward
a well-known New York banker, is quoted as sa3ang foreign govem-
in substance: that an investor should be assured that
a borrowing country is administered economically; that in its
annual budget, income and expenditures balance, and that the
proceeds of any loan applied for are to be used for productive pur-
poses; that from the point of view of the investor dreadnoughts
and rifles are not good security; that a country should provide
out of its own budget, through taxation of its own people or from
internal loans, for everything that may be called its non-produc-
tive expenditures, and that it should restrict its foreign borrow-
ing to such productive purposes as railroads, irrigation schemes,
and such others as may be self-supporting; that in financing
productive enterprises in foreign countries, the most acceptable
form of security would be a bond having a direct lien or mortgage
on the enterprise itself and guaranteed by endorsement by the
Government, rather than a simple government obligation; that a
definite pledge for the service of the loan of all or a portion of some
definite form of governmental revenue would be of advantage; that
foreign loans placed in this country should bear, if possible, a defi-
88 AMERICAN AND FOREIGN INVESTMENT BONDS
nite relation to trade with this country; that, as a general rule,
short-term securities should be avoided, but a redemption provision
should be embodied in every long-time bond; that a sinking fund,
if possible, should be provided; and that in general the obligation
should be of such a character as to be not too great a burden on the
borrower — lest defaults become necessary.^ These suggestions
have much of value. Until the Governments involved in this war
have shown their ability to maintain solvency, Americans should
exercise the greatest care in the purchase of their securities.
Illustrating not only certain principles stated by Mr. Schiff, but
in a broad way everything discussed in this chapter, is the $500,000-
Angio-French ooo Auglo-French loan brought out in September and
doUar loan Qctober, 1915. This loan was in the form of a joint
and several obligation of the United Kingdom of Great Britain and
Ireland and the French Republic. It bore 5% interest and matured
in five years, but was convertible at any time up to maturity into
joint 4|% bonds due in 1940, but redeemable at the option of the
borrowing nations after 1930. The loan was made payable in
American gold dollars, and was brought out at a price and under
conditions calculated to insure its wide distribution among the
American investing public.
In several respects, this loan was unique. It was the largest bond
issue of any kind ever brought out at one time in the United States.
It was the first large loan made by the people of the United States
to foreign nations. It was, moreover, the first external issue ever
put out by Great Britain. And it was, so far as we know, the first
joint and several obligation of two great powers.
Yet fundamentally this loan was an ordinary transaction and
grew out of conditions which we have discussed at length in this
chapter. In its origin the loan was part of a commercial transac-
tion. Great Britain and France under war conditions had been
and were importing from this country such a large excess of mer-
chandise 2 that they were unable to pay for it conveniently with
American securities or with gold. In spite of holdings, by the Eng-
Hsh and French people, of American securities many times the
* Annalist (New York), May 31, 191S, p. SS^i smd Commercial and Financial
Chronicle (New York), May 29, 1915, p. 1801.
^ Their income from expenditures by Americans abroad also had been reduced
greatly.
UNITED STATES AND FOREIGN GOVERNMENT BONDS 89
axQOunt of the loan sought, these securities were not available
immediately to pay for goods. Moderate amounts of such securities
had been shipped to this side, to be sure, almost every week. But
English and French investors ever since the begimiing of the war
had shown a reluctance to part with their American securities.
Earlier in this chapter we called attention to the fact that during
a whole year of war all Europe had sold back to us only between
$300,000,000 and $500,000,000 of our securities. This explains in-
cidentally why the deposit of American securities as collateral for
such a large loan was out of the question.^ As for shipments of gold
by Great Britain and France to pay for their huge debit balance to
this country, this method — even if we allow that it were possible
— would have been a climisy, an unnecessary, and an undesirable
way. Considerable amounts of gold, as well as American securities,
had been and were being shipped to this country. But the English
and the French needed the gold badly to support their banking
structures in time of war and to make purchases which they could
not pay for otherwise. It happened that we did not need the gold
at all. We had already what might be called "an uncomfortable
excess." So the English and the French arranged to buy of us and
we to sell to them the goods they needed on credit. The loan was
caUed and was a "credit" loan — "credit" meaning here a "com-
mercial credit." It established a convenient method for Great
Britain and France to pay for wheat, cotton, manufactures, and
other goods ^ imported from the United States; and from an Ameri-
can point of view, it made possible the marketing with two of our
best regular customers of an unusually large amoimt of the prod-
ucts of our farms and factories. In other words, it did for us what
the loans of Great Britain to other countries for the past hundred
years had done — it financed our trade.
From the investor's point of view, the loan was safe and at-
tractive. The yield — S^ % to s| % — was high and the security
> The English and French might have been taxed or otherwise forced out of holding
their American securities, but measures like this would have been harsh and unde-
^able.
" Probably only a small part, if any, of the loan was used to purchase so-called
"munitions." Such use of the specific proceeds of the loan was uimecessary. Only a
relatively small part of our exports to the Allies were " munitions of war. ' ' In the minds
of American investors, complete separation of "munitions" from the loan would have
had a beneficial effect.
90 AMERICAN AND FOREIGN INVESTMENT BONDS
ample; for — to speak only of one part of the wealth of Great
Britain and France — the four to five billion of American securi-
ties held by the two nations were an asset for the pa3maent of their
debt, whether they sold them back to us or not. Then, again, the
loan was especially safe because it was part of the external or for-
eign debt of the two countries and bore a small proportion to their
domestic debt. For while there is no such thing as a " first mortgage
on the British Empire," or even a first lien in any legal sense, yet it
is a fact that all nations — even nations with records for repeated
scaling of their domestic debts, such as Austria and Russia — have
been careful about the payment of their foreign debts. Morally and
practically they have regarded such debts as having precedence
over their domestic obligations.
In a broad way, this Anglo-French loan marks, we hope and
believe, the entrance of the United States into the family of the
"lending nations." Sooner or later this country would have
reached that position anyway. But the great war has dried up in
Europe the wells of capital available for the development of other
parts of the world. For some time to come, Europe wiU need all her
own capital at home — and probably considerable from this covm-
try beside. She will not be in a position to lend freely to the Argen-
tine, to Brazil, to Mexico, and the other food and raw material
producing countries. Probably she will withdraw gradually a large
part of the huge investment she has in the United States. This is
our opportunity. Not only can we reduce gradually our large capi-
tal indebtedness to Europe, but we can — if we put our house in
order — take Europe's place in lending capital for the development
of the rest of the world, taking in exchange other people's securities
and extending with those people the markets for our own mer-
chandise. The change will not take place all at once. This war, to
be sure, has given us a chance for a colossal stride. Already we have
repurchased (October, 1915) our own securities held abroad or have
loaned to foreign nations to the extent of between say $1,100,000,-
000 and $1,300,000,000. By so much have we reduced our debt to
Europe and by just so much has Europe lost her creditor position.
In proportion to the reduction of the debt, in a broad way, will be
the reduction in interest payments abroad. But it will take some
time (unless the war is unduly prolonged) — perhaps twenty-five
UNITED STATES AND FOREIGN GOVERNMENT BONDS 9I
years — to change from being a "debtor" to a "creditor" nation.
Not until then will New York in any permanent sense become the
financial center of the world: for to become the great international
banker we must establish broad trade relations with aU the rest of
the world, and we must be in a position to finance our foreign trade
by lending freely. We must not be provincial or narrow. To lend
freely we must save. We must, moreover, establish an adequate
merchant marine and satisfactory banking facilities in foreign
coimtries. All these things we must do to seize to the full the
present opportunity and to place the credit of the United States.
indisputably and for a long time to come at the head of the.
Iist.i
It remains only to give an idea of the prices of some of the leading
government bonds under the stress of war on a colossal and unpre-
cedented scale. In February and March, lois, after „,
, . , Warpnces
the war had been m progress about six months, some of government:
of the leading securities of the allied nations were
quoted approximately as follows: ^
British consols, 2^% (Flat) ^ 68185 (February 5)^
French rentes, 3% 681 (March 12)
Italian rentes, 3^% 79i (February 5),
Russian, second series 4% 75 (February 5)
Russian, 1906, 5% 9Si (February 5)
Japanese, sterling, 1910, 4% 71^ (February 5)'
Japanese, sterling, 1905, second series,
4i% 8sfi (February 5)
The London "Economist" * has given highest andlowest prices,,
highest price in July, 1914, and prices on February i6> 1915, of
some leading "enemy" securities — including German imperial
3% bonds, Prussian 3!% consols, Austrian 45% treasury notes,
1 For information in regard to this loan, see Commercial and Financial Chronicle
(New York), vol. loi, p. 1053; Statist (London), vol. 86, p. 14; and Economist (Lon-
don), vol. 81, p. 499.
* Statist (London), vol. Lxxxm, pp. 19s and 406. For later prices of government
bonds of all the nations at war, see Economist (London), July 3, 1915, vol. lxxxi, p. 8.
The latest prices for British consols, one issue of Japanese bonds, and one issue of
Russian bonds, given in this number of the Economist, are "minimum" or "pegged"
prices.
' Prices include accrued interest.
' Economist (London), February 20, 1915, p. 313.
gz AMERICAN AND FOREIGN INVESTMENT BONDS
and Hungarian 4% and 4!% rentes. These prices are hardly worth
quoting. The low prices given represent prices which Englishmen
or, at any rate, traders on the London Stock Exchange would pay
for the government bonds of their enemies, and cannot be taken
as representing the credit of the nations concerned. Furthermore,
interest on " enemy" securities is not being paid to British holders.^
The prices given in our list of loans put out during the war give a
fairer idea of the credit of the various nations. The huge domestic
loan of Great Britain — about $3,000,000,000 — has been put out
in the form of 4I per cents at par, which price includes several
months' accrued interest; and the loan raised in the United States
has been sold to investors at 965 to 98 and interest. The French
national defense bonds have been put out at par ^ for short-term
5% bonds; Russia has put out 5 per cents at 94 and 5-year 5 J per
cents; Italy has borrowed with 25-year 4J per cents and one year
convertible 6 per cents; Germany has put out 5 per cents at from
972 to 99 > Austria has put out 5I per cents at 97I; and Hungary
6 per cents at 97J. The credit of Great Britain remauis highest
of all the nations at war, with France next,' and Germany third.
A decisive outcome of the war one way or the other would have the
effect, of course, of enhancing the market value of the securities of
the victorious nations and of depressing the market value of the
securities of the defeated nations. How radical has been the change
in the credit of all the nations concerned, however, may be seen
by comparing the prices of 1915 with those in our table for 1913.*
^ Economist (London), July 3, 1915, vol. ixxxi, p. 8.
' Advices received from the Boston News Bureau.
' The issue price — 88 — of the 5% perpetual rentes brought out in November,
1915, would seem to show the ciedit of Germany to be higher than that of France.
(See the Statist, vol. lxxxvi, p. 592.)
♦ The following prices of leading government bonds before and during the Franco-
Prussian War may be of interest {Economist [London], September s, 1914, p. 416): —
British, 3% consols
French, 3% rentes.
United SUtes, 6%.
Russian, 4%
Italian, 5%
Oosing
frict
Fluctuations in 1870
Closing
price
1S69
Eishat
Ltmesl
1870
91
94
75
88i
91}
51
86
91
78
89
11
^
60
43
S6
UNITED STATES AKD FOREIGN GOVERNMENT BONDS 93
On February 11, 1915, the United States Panama 3 per cents were
quoted at ioi§ and interest, bid, or only f of 1% less than the
price in January, 1913.^
We have traced the rise and development of the so-called great
powers, whose government bonds are the leading national securi-
ties; we have considered the relation which the debts Summary of
of these nations bore to their resources before the [^"n^ "hf'
present great war; we have taken up briefly the debt prfces'oTgov-
history or record of good or bad faith of the nations emment bonds
issuing these obligations; we have discussed in a general way the
financial, economic, and political status of these nations as bearing
on their credit; and we have tried to indicate as far as possible at
this time the effect of the great war on their condition. All discus-
sions of government bonds involve in a certain way every factor
relating to national existence. Fluctuations in prices of govern-
ment bonds represent in a broad way fluctuations in the resources,
debt, income, expenditure, progress, power, and prestige of the
nations issuing the bonds, as well as fluctuations in the general
economic and financial conditions prevailing throughout the
world. We must remember that government bonds, as we said at
the beginning of this chapter, usually are simply promises to pay
and promises not enforceable by any legal process. We must try
to make up our minds, from all the data available, how good in
each case the promise is.
' Commercial and Financial Chronicle (New York), February 13, 1915, p. S4o-
CHAPTER III
STATE BONDS
State bonds, like government bonds, usually are simply promises
to pay. At times some of our States have issued bonds to railroads,
State bonds canals, or other private corporations and have taken
simp?y pro- ^.s securfty mortgage bonds or stocks of the companies.
mises to pay There have been cases also of railroad or other cor-
poration bonds guaranteed by States. As a rule, however, sound
financing requires that state bonds shall be issued only for strictly
pubHc purposes, and that the interest shall be payable out of taxes
levied on all the taxable property within the State.
In view of the fact that no bondholder — unless the bondholder
happens to be another State — can sue a State without its consent,^
No legal remedy the character or quality of the promise to pay is of
ddadted'stete great importance. The case may be stated even more
bonds strongly by saying that in the last resort there is no
legal remedy whatever for collecting defaulted state bonds. Even
if a verdict is secured in the courts, the Legislature may refuse to
make any appropriation to pay interest ^ or principal. This is for
the reason that in the matter of paying debts a State, like a na-
tion, is a sovereign power.
With allowance for the difference in the character of the unit,
Other factors the f actors determining the safety of state bonds are
the^sSety^^ much the Same as in the case of government bonds.
of state bonds They may be grouped about these headings: —
(i) The debt statement of a State or the proportion of net debt to
property and to population.
(2) The debt history of a State or its record of good or bad faith.
(3) The present constitutional provisions governing the creation
and payment of debt.
' Constitution of the United States, Eleventh Amendment.
* See io8 U.S. 76, New Hampshire vs. State of Louisiana and New York vs. State
of Louisiana, and 192 U.S. 286 (1904), South Dakota vs. North Carolina. The latter
case resulted finally in the settlement of a small amount of defaulted bonds by
North Carolina. (See Commercial and Financial Chronicle, vol. 80, p. 1382.}
STATE BONDS 95
(4) The amount and character of the population.
(s) General considerations bearing on the present and future
prosperity of the State, such as size and location of territory,
natural resources, and water and rail facilities.
We will take up first the debt statements of the various States.
We give on pages 96 and 97 a table for aU the States
of the Union, showing: (i) bonds, special debt to mentsofthe
trust funds, and floating debt; (2) cash, securities,
and sinking-fund assets offsetting same; (3) debts less sinking-
fund assets; and (4) same per capita}
As may be seen from the accompanjdng table (Table I), the
States of Vermont, New Jersey, Delaware, Florida, Iowa, North
Dakota, South Dakota, Nebraska, Kansas, Wyoming, Nevada, and
Oregon have debts less sinking-fund assets of less than $1,000,000
each. The State of Pennsylvania has no net debt at all, and the
State of West Virginia has no debt which it has recognized.^ The
States having debts less sinking-fund assets in excess of $5,000,000
are Massachusetts, Rhode Island, Connecticut, New York, Mary-
land, Ohio, Virginia, North Carolina, South Carolina, Georgia, Ala-
bama, Tennessee, Louisiana, Michigan, Oklahoma, and California.
As far as per-capita net debts go, the States having the smallest
— in addition to Pennsylvania and West Virginia which have none
at all — are: Oregon, $.04; Kansas, $.14; Iowa, $.16; „ „
.IK -Kx 1 1 fl. -riT • iiK 1 Smallest and
New Jersey, f.24; Nebraska, $.31; Imnois, $.39; and largest debts
Indiana, $.49. The States having the largest net debts '^"'
per capita are: Massachusetts, $22.78; Arizona, $13.28; Virginia,
$10.46; New York, $9.05; Rhode Island, $9.02; and Louisiana,
$7.89. In the cases of both Massachusetts and Arizona, the debt
figures include local debts for which the States have made them-
selves responsible.
These figures as to the size of the debts and the net debts per
capita in the various States, while important, must The net debt
not be taken as conclusive in the matter of the rela- fS^ ro^""^
tive safety of the various state bonds. There must <i^sive
be considered in addition not only what the States have to show for
' Table from Department of Commerce, Bureau of the Census, Wealth, Debt, and
Taxation, ipij (Washington, 1915), vol. i, p. 37.
' The State of West Virginia has been held liable for a portion of the debt of the
old State of Virginia. This subject will be discussed later in this chapter.
96 AMERICAN AND FOREIGN INVESTMENT BONDS
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STATE BONDS
97
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98 AMERICAN AND FOREIGN INVESTMENT BONDS
their debts/ but also the proportion between the debts and the
value of taxable property.
Percentaee of ^ ^^^ table OH page 99, we givc asscsscd valuation,
net debt to same per capita, debt less sinking-fund assets, same
uation in the per Capita, and per cent of debt less sinking-f imd assets
erent tates ^ assessed Valuation in all the States in 1912-13.*
This table (Table II) shows that the States of Massachu-
setts, Virginia, North Carolina, South Carolina, Alabama, Missis-
sippi, Tennessee, Louisiana, New Mexico, Arizona, and Idaho have
net debts of 1% or over of their assessed valuations. The largest
percentage of net debt is that of Virginia with 2.55% of its assessed
valuation. States having net debts of less than one tenth of 1% of
their assessed valuations, in addition to Pennsylvania and West
Virginia, are: New Jersey, Ohio, Indiana, Wisconsin, Minnesota,
Iowa, Nebraska, Kansas, Wyoming, and Oregon.
Like the figures for the debts themselves, these figiures showing
the proportion of net debts to assessed valuations are only part of
Relation be- the story. In every State the question arises as to
aS?&u?ra.iufi what part of the actual or true value of property the
of property assesscd Valuation represents.^ In New York State,
for instance, the assessed valuation for 191 2 represents only about
44.51% of the estimated true value of property as given by the
census, and in Pennsylvania the assessed valuation represents only
about 32.79% of the estimated true value. In Ohio the proportion
of assessed valuation to true value of property is about 72.75%,
whereas in Illinois it is only about 15.14%. In Massachusetts the
proportion is 76.20% and in California 34.51%. In any given
State the relation of the assessed value to the true value of the
property, as far as can be ascertained, should be borne in mind in
estimating the burden of debt on the State.
On the whole, it may fairly be said that the debts of our States
are small. This has not always been true to the same extent that it
1 For value of public properties of States, see Abstract of Special Bulletins,
Wealth, Debt and Taxation, 1(113 (Washington, 1915), vol. I, p. 58. The total value
of public properties of all the States in 1913 is given as $695,499,187, compared
with total debts less sinking-fund assets of $34S,942>3oS-
2 Wealth, Debt and Taxation, igij (Washington, 1915), vol. I, pp. 37, 747, 749.
» For estimated true value of all property, 1850-1912, and same per capita by
States, see Wealth, Debt, and Taxation, igis, vol. i, pp. 23-26.
STATE BONDS
99
TA
lBle n
Assessed
taluaUm *
Assessed
valuation
per capita
Debt less
sinking fund
assets
Deht pet
captia
Pereentaee
of net debt
to assessed
$566,807,488
$253.00
$13,132,375
$5.95
2.32%
140,338,191
608.00
3.064,818
13.28
2.18
427,473,108
258.00
1,236,066
0.76
■29
2,921,277,451
1,09500
10,322,744
3.83
.35
422,330,199
478.00
3,173,949
3-70
•75
1,041,334.019
881.00
7.110.4S1
«.I2
.68
93,814,011
451-00
763.122
3.70
.81
212,887,518
258.00
619,199
0.77
■29
842,358,342
308.00
6,934,302
2.57
.83
167,512,157
442 .00
3,143,314
5.92
1.28
2,343,673,232
397.00
3,272,620
0.39
.10
1,898,307,218
688.00
1,350,305
0.49
•07
902,092,597
406.00
356,670
0.16
■°^„
3,746,900,291
1,630.00
243.121
0.14
.008
1,031,174,033
441.00
4.441.867
1.90
'43
550,517,808
315.00
13.546.150
7.89
3.4fi
416,891,264
SSO.oo
1.254,998
1.67
■30
1.235,457,607
929.00
7.333,913
5.56
•59
4,803,078,625
1.353.00
79.551.090
22.78
1.66
2,317,561,634
789.00
7,089,092
3.41
•31
1,474.585.315
676.00
1,345,290
0.63
.09
i,86o!o87[956
319.00
4,460,519
3.41
1.08
555-00
4,671,218
1.40
-35
346,550,585
827.00
1,512,874
3.73
•44
463,371,889
376.00
374.394
0.31
.08
101,087,082
1,067.00
607,695
6.70
.60
, 439,683,132
1,007.00
1.955,611
4.50
■44
2,490,490,534
906.00
642,069
0.34
.03
72,457,454
196,00
1,218,209
3.41
1.68
11,131,778,917
1,146.00
86,205,347
9.05
.77
747,500,632
324.00
8,058,430
3.54
1.08
293,048,119
443.00
830,424
1.29
.31
6,481,059,158
1.30500
5,142,042
I. OS
.08
1,193,655,846
616.00
6,930,243
3.74
•58
905,011,679
1,196.00
30,853
0.04
.003
5,068,802,988
625.00
—
619,010,208
1,068.00
5,136,815
9.02
.83
291,531.003
185.00
6,190,036
3.98
3.13
354.278^413
551.00
370,000
0.58
.10
625,686,793
280.00
11,811,640
S.32
1.89
2,532,710,050
607.00
4,656,499
1.14
.18
200,399,207
49S.OO
1,429,694
3.62
•71
221,530,142
615.00
569,906
1.58
.36
864,962,621
406.00
33,043,145
10.46
3.55
1,005,086,251
747.00
1,556,012
1.21
•IS
1,168,012,658
894.00
—
2,466,636,793
1,019.00
3,251,000
0.93
.09
180,750,630
1,107.00
123,375
0.77
•07
State
Alabama
•Arizona
Arkansas
California
Colorado ,
Connecticut
Delaware ,
Florida
Georgia ,
Idaho
Illinois ,
iT^diana
Iowa
Kansas
Kentucky ,
Louisiana
Maine
Maryland . . . . ,
Massachusetts . .
Michigan ,
Minnesota
Mississippi
Missouri
Montana
Nebraska ,
Nevada
New Hampshire
New Jersey . . . .
New Mexico . . . ,
New York
North Carolina .
North Dakota . .
Ohio
Oklahoma
Oregon
Pennsylvania . . .
Rhode Island. . .
South Carolina ,
South Dakota . .
Tennessee
Texas ,
Utah
Vermont ,
Virginia
Washin^on
West Virginia . ,
Wisconsin
Wyoming
* Assessed valuation of all property subject to ad valorem taxation. There was in many States a large
increase in assessed valuation m igz3. .Among these States may be mentioned Alabama, Colorado, Idaho,
Kentudiy, and South Dakota. (See Slate and City Supplement of the Commercial and Financial Chronichf
May 39, 191S-)
is to-day. In 1790/ the National Government arranged to as-
sume state debts incurred largely for the Revolution- changes in
ary War, and did actually assume $18,271,786.47 s^tl^bts
of these debts. Between 1790 and 1820, the States 1790-1913
' Act approved August 4, 1790, ist Cong., 2d Sess. (i Stat. L. chap, xxxiv,
P- 139.)
lOO AMERICAN AND FOREIGN INVESTMENT BONDS
incurred only a small amount of debt. From 1820 to 1830, they
issued bonds amounting to $26,470,417, and from 1830 to 1838,
$147,836,577.1 The Civil War brought a large increase in the debts
of many of our States.^ For the years from 1870 to 1913 inclusive,
the table ' on page loi shows the total debts, net debts, and net
debts per capita of aU the States.
As may be seen from the table, the total debt less sinking-
fund assets of aU our States in 1913 actually was less than in 1870.
The lowest point was reached in 1895, after which there was a grad-
ual increase until 1913, when an unusual increase took place. This
was due probably to the exceptional demand for securities of the
class of state bonds and to the tendency of certain States in recent
years to issue large amounts of bonds for roads, canals, and other
improvements. Owing to the rapid increase in population, the
per capita increase has not always followed closely the absolute
increase. The lowest net debt per capita for the period covered by
the table was reached in 1909 and the highest in many years in
1913. On the whole, as stated above, the aggregate debt of our
States may be spoken of as moderate.
This comparative freedom of our States from debt has been the
result, in most cases, of long and sometimes bitter experience. At
Comparative some time in their history, twenty of oiu: States, in-
beedomfrom eluding some of our bcst Northern States, have de-
debt due to ° , '
bitter ex- faulted the mterest on their bonds or compromised
nence ^^ repudiated the principal.
When we remember that it is impossible in the present condition
Importance of of the law to force a State to pay its bonds, the record
debt history ^f ^j^g different States in the payment of their obliga-
tions becomes of commanding importance.
There were three periods of default, compromise, or repudiation:
(i) From 1840-42, when Pennsylvania, Maryland, Indiana, Uli-
Three periods nois, and Michigan, as well as Florida, Mississippi,
wmpro"^or ^nd Arkansas defaulted; (2) from 1848-60, when
repudiation Minnesota, Texas, and California began certain ad-
justments of their debts; and (3) from the beginning of the Civil
War down to the early nineties, when Virginia, North Carolina,
> tenth Census, vol. vn, p. 523. » Ibid., pp. 530, 537, 554.
» National and Stale Indebtedness, iSjo-igzs, p. 18.
STATE BONDS
lOI
South Carolina, Georgia, Florida, Alabama, Tennessee, Louisiana,
Arkansas, and Missouri defaulted on or compromised their bonds.
In this period also arose the difficulties between Virginia and West
Virginia.
TOTAL AND NET DEBT AND NET DEBT PER CAPITA OF
ALL THE STATES, 1870-1913
Year
1870.
1880,
1891.
1892.
1893.
1894.
189s
1896
1897,
1898
1899
1900
1901
1902
1903
1904
190S
1906
1907
1908
1909
1910
1911
1912
1913
Total Debt
$352,866,698
306,016,561
258,195,056
249,266,723
240,175,83s
233,146,225
225,488,146
226,702,714
237.043.590
253.957,941
261,118,967
265,133,041
262,247,074
274,148,756
266,926,910
272.493.578
278,135.397
281,411,192
279.768,751
290,029,63s
300,494,024
322,948,868
347,041,981
376,114,098
422,796,525
Sinkmg-Funi
Assets
$31,270,789
46,984,569
43,518,777
38,124,440
37,429,077
31,271,660
28,123,908
28,358,779
30,049,746
32,602,117
29,821,060
33,856,273
34,859,467
34,791,189
36,846,091
39,264,804
42,952.929
44,501,415
50,655,306
59,355,095
66,813,710
71,177,988
76,451,848
76,980,571
Debt less Sinking-
Fund Assets
Amount
Per
Capita
$352,866,698
274,745.772
211,210,487
205,747,946
202,051,395
196,194,298 '
194,216,486
198,578.806
208,684,811
223,908,195
228,571,048 »
23S.453.594 '
228,478,997 '
239.369,271 '
232,135.721
23S.647.487
238,870,593
238,458,263
235,267,336
239,374,329
241,138,929
256,143,276 '
275,919,983 '
299.763.423 '
345,942,305 "
B9.1S
5-48
3-3r
314
3-03
2.88
2.80.
2.81
2.90.
3 06,
.3-07
3.10.
2.9s
3-03
2.88
2.86
2.8s
2.79.
2.70.
2.70,
2.67
2.78
2-95
3 IS
3-57
> Not reported. ' Sinking fund exceeds debt $477.iSo — Rhode Island.
' Sinking fund exceeds debt $54,198 — New Jersey.
< Sinking fund exceeds debt $141,613 — New Jersey.
» Sinking fund exceeds debt $88,196 — New Jersey.
• Sinking fund exceeds debt $79,982 — New Jers^.
' Sinking fund exceeds debt $8,118 — Pennsylvania,
s Sinking fund exceeds debt $S5,990 — Pennsylvania.
» Sinking fund exceeds debt $101,173 — Pennsylvania.
10 Sinking fund exceeds debt $126,351 — Pennsylvania.
I02 AMERICAN AND FOREIGN INVESTMENT BONDS
The earliest period of default followed the financial crisis of
1837-39. At the beginning of 1830, the debts of the States were
only about $13,000,000. In 1834, the last installment
of the United States debt was paid — an act which
firmly established our credit abroad. In view of the fact that the
States did a large part of their borrowing in London, the impor-
tance of this becomes apparent. Provision was made in 1836 for
distribution of the surplus revenues of the United States among the
several States.^ Furthermore, the period was a prosperous one all
over the world. There had been in our country a real and substan-
tial growth, although the population and resources of the Western
States were small. These favorable factors were magnified by other
influences of a more doubtful character. The fight between the
United States Government and the United States Bank caused the
chartering of large numbers of state banks all over the country.
Paper money became abundant, and a spirit of speculation per-
meated the whole country. "Men acted as if a short and secure
road to wealth had been discovered, on which all might travel, and
he who went the fastest would be the first to reach the desired
end." ^ The States borrowed money generously and spent it lav-
ishly. Internal improvements were undertaken on a huge scale.
Rashness became "epidemic." Before the crash came, high prices
for practically everything prevailed. Then, more or less suddenly,
the Bank of England stopped the credit of several American bank-
ing houses in London. Suspension of specie payments soon fol-
lowed, then a short renewal, and then a second suspension. Not
only the Bank of the United States in Pennsylvania, but every
bank south of Philadelphia, stopped payment. By 1840 many of
our States were in financial difficulties.^
In the following pages we shall attempt to give a short debt his-
Compiete short tory of all the defaulting States. So far as we know,
drfaiUtiiS^'^ °' this is the only collected history, written from sources
States a,nd brought up to date, which includes all the States
1 Tenth Census, vol. vn, p. 529.
' North American Review, Janiiary, 1844, p. 114.
• Ibid., pp. 110-22. See also Bankers' Magazine and Statistical Register, Novem-
ber, 1849, pp. 341-43. For a short discussion of the origin and^development of the
internal improvement Idea, see Dewey, Financial History of the United States (New
York, 1915), pp. 212-16.
STATE BONDS I03
at one time or another defaulting on their bonds. In view of the fact
that the experiences of many of these States have been more or
less similar, some readers may prefer to follow the histories only of
such States as interest them. The very similarity, however, of so
many of the debt histories makes all the clearer the lessons to be
learned. Not only the reasons for default are established, but the
way in which the bondholders fared in final settlement.
August I, 1842, Pennsylvania defaulted interest on its bonds. ^
In 1 82 5 , the State had entered upon an important sys-
tem of internal improvements. Under the impulse of
an act ^ passed in 1836 to charter the United States Bank, —
which act also repealed the state tax on real and personal property,
— a new series of improvements was begun. Bonds were issued,
largely in aid of railroads and canals, until in 1842 the state debt
had reached $37,319,395- After the panic of 1837, work on the
state improvements ceased, and many of the properties passed into
private hands. For a large part of its debt, the State obtained
nothing whatever. Furthermore, it was obliged to receive in pay-
ment of revenues its own "relief notes" or depreciated currency.
Under this combination of unfavorable circumstances, the State
was unable to pay interest in cash.
It issued for interest, however, 6% certificates or scrip.' At one
time something over $3,000,000 of principal was overdue. Im-
proved methods of assessment and a revision of the tax laws en-
abled the State to resume interest payments in February, 1845.
At first, these payments were made to a considerable extent in
"relief notes." In 1848, only a small amount of these notes re-
mained outstanding.^ In 1857 and 1858, provision was made for
retirement of a considerable portion of the principal of the debt
through sale of raDroad and canal property.^
In January, 1842, Maryland failed to pay interest on its debt.
Like Peimsylvaiua, Maryland had breathed in the , .
, , , , ... 1 . -1 M 1 • Maryland
spirit of unbounded optimism which prevailed in
the ten or a dozen years preceding 1837. It had subscribed to the
1 North American Review, January, 1844, p. 122.
^ Laws of Pennsylvania (1835-36), no. 22.
' See Laws of Pennsylvania (1842), no. 127.
< For above account, see Hunt's Merchants' Magazine, March, 1849, pp. 257-68.
" See Tenth Census, vol. vii, p. 544.
I04 AMERICAN AND FOREIGN INVESTMENT BONDS
stocks of various railroads, including the Baltimore and Ohio, and
had loaned money to and purchased the stock of the Chesapeake
and Ohio Canal. At the time when the State was using thus its
credit, it had no system of taxation whatever. It depended solely
on the income of the public works, or else on the sale of additional
bonds, to meet the interest on its debt. The general insolvency
following the panic of 1837 caused a suspension of the canal works
for some years. The income from all the improvements was far less
than the amount necessary to pay interest on the state debt, and
the State was unable to negotiate further bonds abroad.
To meet this situation, laws were passed in 1841 and 1842 ^ pro-
viding for a direct tax. The lack of a proper system for collecting
the taxes, however, together with the difficulty of the times, made
this measure ineffective. When the State found itself imable to pay
interest, it received coupons in payment of taxes. From 1844 to
1846, it made partial payments on interest current and accrued.
Later, it funded arrears of interest with 6% bonds. On January i,
1848, it resumed current interest on its public debt in fuU. Al-
though at one time some people in the State had shown a leaning
toward repudiation,^ the record of Maryland as it was written was
such as to inspire confidence in its good faith.*
Indiana suspended interest payments after January, 1840. In
keeping with the spirit and practice of the times, the State had
issued bonds in aid of the Wabash and Erie Canal, the
Indiana ^ _^,-^,, ,_ , ,
State Bank of Indiana, and other pnvate enterpnses.
The negotiation of the bonds had been a source of "fearful jobbing "
and had resulted in serious losses to the State. When in 1839 it
became impossible to borrow more money, the public works were
suspended and many of them were surrendered or abandoned. It
was impossible to collect from the small farmers, who made up most
of the population at this time, sufficient taxes to meet the interest
on the heavy debt. At the time of default there was also a consider-
• Laws of Maryland, vol. 20 (1841), chap. 23; ibid., vol. xxi (1842), chap. 116;
ibid., chap. 328.
2 For above account, see North American Review, January, 1844, pp. 125-27, and
Hunt's Merchants' Magazine, May, 1849, pp. 483-89.
' In 1837, when banks had suspended specie pajrments, Maryland paid its inter-
est in gold or silver or its equivalent. (Hunt's Merchants' Magazine, May, 1849,
p. 487.)
STATE BONDS I05
able amount of State paper outstanding receivable for taxes. The
tender of this prevented, of course, the receipt of money available
for interest.
To settle the interest, state bonds bearing 7% interest and re-
deemable in five years were offered, but of these only a trifling
amount were accepted. The principal and back interest of the debt
finally were settled by an act passed January 19, 1846, and
amended January 27, 1847.^ These acts provided that one half the
old debt and interest should be taken care of with new bonds pay-
able from taxation and the other half with certificates payable from
the property and tolls of the Wabash and Erie Canal.^ Cash inter-
est pajonents on state bonds were resumed at the rate of 4% July
1, 1847.'
July, 1841, Illinois stopped payment of interest on its debt. An
act* for an immense system of internal improvements had been
passed in 1837. Bonds had been issued for railroads, .
bank-stocks, and the Illinois and Michigan Canal.
When "the great revulsion overtook the commercial world," all
work on the public improvements stopped. Many banks which
had bought state bonds failed, "and the State never got any-
thing." Banks to whose capital the State had subscribed finally
were wound up "with total loss of capital." The State was
obliged, moreover, to receive its own depreciated paper for public
dues. In 1844, the total debt, including interest, was given by
the Governor as $14,440,381.^ Like Indiana, Illinois at this time
simply was unable to pay."
Within a few years, however, the Illinois and Michigan Canal
was completed, interest on that part of the state debt was paid to
date, and the process of discharging the principal was begun.^ To
1 General Laws of Indiana (1845-46), chap, i; ibid. (1847), chap. i.
' The canal was completed and for a time paid promptly interest on the certi-
ficates. Later, however, it proved a failure. (See Tenth Census, vol. vii, pp. 621-22,
and Commercial and Financial Chronicle, vol. 19, p. 493.)
• For above account, see Hunt's Merchants' Magazine, August, 1849, pp. 150-60.
* Public Laws of Illinois (1836-37), pp. 121-52 Supplemental Act. Ibid., pp.
152-53- (Both approved March 4, 1837.)
» Hunt's Merchants' Magazine, December, 1852, pp. 661-64; ibid., March, 1858,
p. 278.
» North American Review, January, 1844, p. 127.
' Hunt's Merchants' Magazine, March, 1858, p. 279.
Io6 AMERICAN AND FOREIGN INVESTMENT BONDS
take care of the state debt other than the canal debt, annual taxes
were provided.^ January i, 1857, the Governor of the State de-
clared that during the past four years $4,564,800.40 had been paid
in liquidation of the public debt as well as interest on the principal
during that time. "There is now no doubt about the State being
prepared to pay the interest upon her whole debt as it matures in
future.^ The record of Elinois is one of delayed payments, but of
payments in full.
Michigan defaulted in its interest payments July i, 1841.' The
Constitution of the State adopted at the time of the
admission of the State to the Union urged the con-
struction of a system of internal improvements.* In 1837, the
Legislature projected a system of improvements, including rail-
roads, canals, and river improvements, exceeding both the means
and the needs of the people. A loan of $5,000,000 was authorized
for these objects.^ The State was to sell its bonds through an
" agent" — the Morris Canal and Banking Company of New York
— and to receive payment in installments. Under this arrange-
ment, the State marketed $1,362,000 of its bonds at par less a
commission of 2|%. The agent was unable to settle for the re-
maining $3,638,000 bonds. These bonds, with $200,000 railroad-
aid bonds, were then sold to the United States Bank at Philadelphia
and the Morris Canal and Banking Company on time. Both
concerns failed and the State received only $998,000. The State
was unable to meet its interest, and work on the public im-
provements was stopped.
In settlement, Michigan agreed to acknowledge as much of its
debt as it had received payment for in tuH. For interest on this
from July i, 1841, to July i, 1845, it issued new 6% bonds.' Bonds
for which the State had received no payment were to be canceled.
' Const. III. (1848) , art. XV. This part of the debt had been funded to a large extent
under an act passed in 1847. (See Public Laws of Illinois [1846-47], pp. 161-65.)
' Hunt's Merchants' Magazine, May, 1857, p. S4S-
» North American Review, January, 1844, p. 134.
* Constitution of Michigan (1835), art. xn, sec. 3.
' Hunt's Merchants' Magazine, February, 1850, pp. 133-34. Act approved
March 21, 1837, as amended by act approved November 15, 1837. {Laws of Michi-
gan [1837], no. 77; ibid. [1837-38], no. i.)
° Hunt's Merchants' Magazine, February, 1850, pp. 136-37. Act approved March
8, 1843. (Laws of Michigan [1843], no- 73-)
STATE BONDS I07
In settlement of bonds for which the State had received only partial
pa3rments, it arranged to issue new bonds for the amount received
by the State, together with interest, but less damages for non-
pajnnent.^ The amount actually received on part-paid bonds was
ascertained to be $s°2^-^ per $1000. Later, the State sold certain
railroads and accepted pajrment in state bonds on the basis of the
above settlement.^ The weak point in Michigan's record arises
from the fact that part-paid bonds had been pledged by the
United States Bank in Pennsylvania to secure loans from various
banking houses in Europe, and appeared to be in the hands of
innocent purchasers.'
After January i, 1840, the then Territory of Florida paid no
interest on an issue of bonds of the Bank of Pensacola endorsed
by the Territory. In addition to this endorsement,
Florida had issued bonds to supply the capital of the
Union Bank of Florida, and later, bonds in behalf of the Southern
Life Insurance and Trust Company.* In 1837, the banks suspended
specie payments and soon after were found to be hopelessly insol-
vent. The population of Florida in 1840 was only about 50,000, and
the liabilities of the Territory fairly heavy. ^ The bonds referred to
the Territorial Legislature later repudiated.' The Constitution of
the State, adopted before the admission of Florida to the Union,
denied to the Legislature the power of laying any tax for the
purpose of paying the bonds which were issued by the Terri-
tory.''
Again, in 1873, the Legislature refused to make provision for
certain state bonds in default — notably $4,000,000 bonds issued
to the Jacksonville, Pensacola, and Mobile Railroad Company.'
At this time Florida had a funded and floating debt of nearly
twenty per cent of its total assessed valuation. The taxes collected
» See Laws of Michigan (1842), no. 60, and ibid., p. 172 (Joint Resolution no. 38).
' Hunt's Merchants' Magazine, February, 1850, pp. 138-39. See Laws of Michi-
gan (1842), no. 60.
» North American Review, January, 1844, pp. 136-37.
* Bankers' Magazine, December, 1857, pp. 449-50.
« Tenth Census, vol. vn, p. 587-
« Bankers' Magazine, December, 1857, p. 430.
' Constitution of Florida (1838; effective March 3, 1845), art. vm, sec. 2.
' Commercial and Financial Chronicle, vol. 16, p. 387. Tenth Census, vol. vn,
pp. 588-89. Fart of these bonds were for the benefit of the Florida Central Railroad.
I08 AMERICAN AI^ FOREIGN INVESTMENT BONDS
had proved insufficient for the requirements of the State. ^ Further-
more, a good deal of railroad property had been destroyed during
the Civil War.!*
Yet the method of escape chosen and the excuse given were char-
acteristic. The Attorney-General of the State declared that there
was no provision by law for assessing a tax to pay either principal
or interest on state bonds issued to the Jacksonville, Pensacola, and
Mobile Railroad. He alleged fraud and illegality, and declared that
the Legislature never would authorize a tax to pay the bonds.'
The Supreme Court of Florida sustained the Attorney-General and
the Legislature in the repudiation.* In 1912, the Council of the
Corporation of Foreign Bondholders, London, listed $7,000,000 old
bonds of Florida in default.^
After July i, 1840, Mississippi paid no interest on $2,000,000
bonds put out to subscribe to the stock of the Planters' Bank,* and
.... in 1842, repudiated, on the ground of illegality and
alleged fraud, a $5,000,000 issue put out to promote
the Union Bank.^ Both the Planters' Bank and the Union Bank
failed.* It was for this reason rather than from inability to pay that
Mississippi refused to recognize its bonds. The resources of the
State were ample.' Furthermore, in the case of the Union Bank
bonds, the Legislature of 1839 had resolved "that the sale of the
bonds was highly advantageous to the State and the bank." ^"
There were no substantial grounds of illegality in either case. The
State Court of Errors and Appeals had held the Union Bank bonds
' Commercial and Financial Chronicle, vol. 16, p. 187, and vol. 17, p. 19.
' International Review, November, i88o, p. S79-
' Commercial and Financial Chronicle, vol. 17, p. 323.
" Holland v. The State of Florida et al., 15 Florida, 455 (1876).
' Thirty-ninth Annual Report, Council of the Corporation of Foreign Bondholders,
P-36S-
' Bankers' Magazine, January, 1853, p. 497, and November, 1849, p. 342.
December 2, 1852, the people voted against paying these bonds. {Bankers' Mag-
azine, January, 1853, p. 499.)
' North American Review, January, 1844, p. 132. Thirty-eighth Annual Report,
Council of the Corporation of Foreign Bondholders, p. 388.
* Bankers' Magazine, December, 1846, p. 339. Thirty-eighth Annual Report,
Council of the Corporation of Foreign Bondholders, pp. 39-40. North American
Review, January, 1844, p. 130.
• Bankers' Magazine, December, 1850, pp. 454-56, and ibid., November, 1849,
P- 349-
" North American Review, January, 1844, p. 132.
STATE BONDS I09
valid obligations of the State, and the legality of the Planters'
Bank bonds was not seriously questioned.^
The Constitution of Mississippi, as amended in 1876, prohibited
the State from ever pajing the Union Bank bonds or the Planters'
Bank bonds." Judge Curtis long ago wrote laconically that, in the
payment of debts, there was a great difference between " the people
of Mississippi and the people of Massachusetts." ' Mississippi can
claim the honor of inventing the word "repudiation" in the sense
in which it is now used.^
Arkansas was in default in 1841.^ The State had issued bonds
in aid of the State Bank of Arkansas and the Real Estate Bank
of Arkansas.' Later, the banks were placed in liqui-
dation by an act of the Legislature.'' For many
years, no interest was paid on the public debt. This was not due
to lack of resources nor was it owing to any well-groimded claims
of fraud. In 1845, the impaid interest on the state debt amoimted
at least to as much as the principal. A moderate tax would have
sufficed to take care of the accruing interest, yet such a tax the
Legislature refused to levy.^
In 1869, an act ' was passed for fimding a portion of the state
debt with new 6% bonds. By the close of 1870, Arkansas again
had increased its debt by issuing bonds for building levees and
over $5,000,000 bonds in aid of railroads.^" Some of the levee bonds
issued to contractors were sold by them as low as twenty-six to
twenty-seven cents on the dollar.^^ In 1873, all the aided railroads
defaulted in interest, and the State did likewise.^" On January i,
1878, the total debt of Arkansas had reached a figure of nearly
twenty per cent of the assessed valuation of the State.^'
1 Bankers' Magazine, November, 1853, p. 432. Thirty-eighth Annual Report,
Council of the Corporation of Foreign Bondholders, pp. 386 and 388.
2 Constitution of Mississippi, art. xii, sec. s, as amended January 18, 1876. See
Constitution of i8go, art. xiv, sec. 258.
5 North American Review, January, 1844, p. 133.
* See Bankers' Magazine, December, 1846, p. 339.
» Bankers' Magazine, December, 1854, p. 488.
' Hunt's Merchants' Magazine, May, 1857, p. 542.
' Tenth Census, vol. 7, p. 603. ' Bankers' Magazine, December, 1854, p. 488.
» Acts of Arkansas (1868-69), no. 55.
w Commercial and Financial Chronicle, vol. 27, p. 15, and vol. 36, p. 706.
" Ihid., vol. 14, p. 85. '* Ibid., vol. 36, p. 706, and vol. 40, p. 119.
" Commercial and Financial Chronicle, vol. 25, p. 161.
no AMERICAN AND FOREIGN INVESTMENT BONDS
In the sam6 year, the Supreme Court of the State, on technical
grounds, held the levee bonds unconstitutional and void.^ The
state legislature repudiated aU the railroad bonds because "au-
thorized by alien adventurers"^ — the so-called "carpet-bag-
gers" from the North. This action was confirmed by the Supreme
Court of the State.' Against certain bonds included in the fimding
of 1869, and known as "Holford" bonds, the people of Arkansas
later charged fraud.* In 1885, an amendment to the Constitution
of the State prohibited levying a tax or making an appropriation
to pay interest or principal of the Holford bonds, the railroad-aid
bonds, and certain of the levee bonds.' In March, 1887, the Legis-
lature passed an act* providing for the "undisputed" debt, in-
terest on which had been in default since 1872. Under an act
passed in 1899, provision was made for refimding the recognized
debt with an issue of 3% thirty-year bonds.^ The principal of
the debt of Arkansas unprovided for in 191 2 has been given as
$8,706,773.8
The second period during which there broke out difficulties with
state bonds — between 1848 and i860 — was of minor impor-
Second period tauce. The troubles of Texas began before it was
comprise annexed to the United States, and the difficulties of
or repudiation California proved to be largely a question of legality
and not of inability or unwillingness to pay. The case of Minne-
sota was the only one resembling many of the earlier and many
of the later defaults.
An amendment ^ to the constitution of Minnesota adopted No-
vember 6, i860, provided that no law for the payment of prin-
* Smithee v. Garth, 33 Ark. 17.
* Commercial and Financial Chronicle, vol. 31, p. 303.
» State of Arkansas v. Little Rock, Mississippi River, and Texas Railway Com-
pany, 31 Ark. 701.
* Commercial and Financial Chronicle, vol. 33, p. 328. For history of "Holfords,"
see Tenth Census, vol. 7, p. 603.
' Constitution of Arkansas (1874), Amendment no. i, adopted January 14, 1885.
' Acts of Arkansas (1887), p. 269, Act cxxvi. Commercial and Financial Chronicle,
vol. 44, p. 421, and vol. 40, p. 119.
' Acts of Arkansas (1899), p. 269, Act cxLvni.
' Thirty-Ninth Annual Report, Council of the Corporation of Foreign Bondholders,
P- i(>S-
* Constitution of Minnesota (i860), art. DC, sec. 2, as amended November 6, i860.
See General Statutes of Minnesota (1866), p. 37.
STATE BONDS III
cipal or interest of $2,275,000 state bonds issued in aid of rail-
roads should take effect until ratified by popular vote. , ,.
The railroads, which had turned over first-mortgage
bonds to the State, had become insolvent. When partially com-
pleted, they had foimd themselves unable either to negotiate their
own securities except at "ruinous rates" or to sell any considerable
amount of state bonds issued for their benefit..^ In 1862, the
State granted to the railroad companies title to lands and other
property free and clear.^ Some of the state bonds had gotten into
the hands of contractors and other innocent holders.* For many
years, the State refused to recognize any of this debt. At one time
the "Grangers" and later the national "Greenback-Labor" party
were prominent among the repudiators. One "Granger" not only
wanted elected judges pledged to "wipe out the bonds," but was
ready to "wipe out the Supreme Court" of the United States if
that court should by any chance declare the bonds an obligation
of the State. According to good opinion, the State was able to pay
its entire railroad debt without serious inconvenience.*
In 1 88 1, the Supreme Court of the State held invalid the con-
stitutional amendment repudiating the bonds,^ and thereby left
to the legislature authority to settle the debt. At a special session
of the legislature called September 19, 1881, an act * was passed
providing for the settlement of the old debt on the basis of fifty
cents on the dollar of cash or new 5% bonds for old 7% bonds and
interest. On January 14, 1882, all but $108,000 of the $2,275,000
state railroad bonds had been paid at this rate in new bonds or
cash.''
The state legislature of Texas in 1848 passed an act * to provide
for ascertaining and auditing the debt of the late
Republic of Texas — interest on which was in de-
fault. When Texas seceded from Mexico in 1835, it had a popula-
1 Tenth Census, vol. vn, pp. 633-34.
' Special Laws of Minnesota (1862), chaps, xvn and XX, pp. 226 and 247.
' Scott, The Repudiation of State Debts (New York and Boston, 1893), p. 155.
* Lalor's Cyclopcedia of Political Science (Chicago, 1884), vol. m, p. 608.
' State V. Young, 29 Mmn. 474.
' Laws of Minnesota (1881, extra session), chap. i.
' Tenth Census, vol. vn, p. 634. For interesting data bearing especially on the
legality of the Minnesota railroad debt, see Minnesota State Bonds (New York, 1871).
' Laws of Texas (1848), vol. n, chap. 143.
112 AMERICAN AND FOREIGN INVESTMENT BONDS
tion of less than 140,000, of whom only about one third were white
— the balance being principally Indians. The Republic had its
independence to maintain, Indian marauders to keep off, and the
other expenses of government to meet.^ For a large part of its
debt, it was claimed, Texas had not received an3rwhere near face
value. The state authorities divided the debt into three classes
on the basis of the estimated value of the claims. The entire
amovmt, including interest, was given as $9,647,253.14, to which
was assigned a value of $4,807,764.37.
On this basis it was proposed to settle the debt. When Texas
had become a State, the United States had possessed itself of
certain customs resources which had been pledged to secure the
debt of the Republic." In the Texas "boundary biU," ' the United
States, for the sake of including in New Mexico certain territory
claimed by Texas, agreed to pay Texas $10,000,000 in 5% bonds,
provided that only $5,000,000 should be issued until creditors of
Texas had released the United States from all claims on accoxmt
of customs pledged. The second five million never was received
because the State could not comply with the conditions.^ Febru-
ary 28, 1855, the United States appropriated $7,750,000 in cash
and apportioned it among those creditors of Texas claiming against
the United States.* At the close of 1856, the State was declared
to be out of debt.*
California was in default in interest in January, 1854.'' The
. early debt had been incurred largely for State ex-
penses.* In 1856, the Supreme Court of the State de-
clared all the surplusage of indebtedness above the $300,000 limit
' State and City Supplement of the Commercial and Financial Chronicle, April 29,
1893, p. 175.
2 Tenth Census, vol. vn, pp. 600-01.
' Acts of 31st Congress, ist Sess., chap. XLix, approved September 9, 1850 (9 U.S.
Stat, at Large, p. 446). Tenth Censtis, vol. vn, p. 601.
* State and City Supplement of the Commercial and Financial Chronicle, April 29,
1893, p. 176.
' Acts of 33d Congress, 2d Sess., chap, cxxix, approved February 28, 1855 (10
U.S. Stats, at Large, p. 617.) See Laws of Texas (1855-56), chap. l. For laws of Texas
passed to settle debt, see Laws of Texas (1849-50), chap. CLVu; ibid. (1851-52),
chaps. L, xcvm, cv. Various subsequent provisions were made for the same purpose.
° Tenth Censtts, vol. vn, p. 601.
' Bankers' Magazine and Statistical Register, December, 1854, p. 488.
' Tenth Census, vol. vn, p. 644.
STATE BONDS II3
fixed by the Constitution of 1849 null and void.^ In April, 1857,
the legislature passed an act ^ calling in the various illegal issues
and authorizing $3,900,00x3 new bonds to be exchanged for the
old. In April, i860, another act * was passed authorizing $200,000
additional bonds to adjust an error in the original refunding.
The third period of difficulties with state bonds — from the
time of the Civil War down to the early nineties — may be called
the true period of repudiation. It is concerned only Third period
with the Southern States.* The causes of the de- °omprom'ise
faults and repudiations of most of the Southern or repudiation
States during this period were in part the same and in part differ-
ent from the causes of the earliest defaults discussed above. There
was the same lack of understanding of the proper purposes for
which state debts should be created and the same inadequate idea
of the proper management of state finances. There was in addition
the weakening of the South by the Civil War. Before the war,
the Southern States, as a whole, were wealthy and prosperous.
In i860, the total assessed valuation of Virginia, North Carolina,
South Carolina, Georgia, Florida, Alabama, Mississippi, Louisiana,
Arkansas, Tennessee, and Missouri was $4,332,901,458, and in
1880 the total assessed valuation of the same States, with the
addition of West Virginia, was $2,232,790,584.^ This was partly
owing to the removal of slaves from the list of taxable property
and partly owing to a general undervaluation of property.^ There
was, however, a real loss from the point of view of raising taxes.
In addition to the economic weakening of the South on account
of the war, there was in most of the States so-called "carpet-bag"
government with all its incompetency and dishonesty. As far as
* Nougues V. Douglass et al., 7 Cal. 65. Constitution of California (1849), art.
vni.
* Statutes of California (1857), chap, ccxuv, approved April 28, 1857.
" Ibid, (i860), chap, cccixm, approved April 30, i860.
* The Fourteenth Amendment, section 4, of the Constitution of the United States,
ratified by three fourths of the States before the close of 1868, reads: "But neither
the United States, nor any State shall assume or pay any debt or obligation incurred
in aid of insurrection or rebellion against the United States, or any claim for the loss
or emancipation of any slave; but all such debts, obligations, and claims shall be held
illegal and void."
" Tenth Census, vol. vn, pp. 4 and 16.
' See the Tenth Census, vol. vn, for estimated true values of property in the given
States in i860 and 1880.
114 AMERICAN AND FOREIGN INVESTMENT BONDS
misappropriations go, these have been referred to as not exceed-
ing $20,000,000.^ The irregularities in the handling of state debts
were so numerous and so complicated, however, that it is impos-
sible to estimate with any accuracy the losses from this source. In
this period Virginia, North Carolina, South Carolina, Georgia,
Florida, Alabama, Tennessee, Louisiana, Arkansas, and Missouri
defaulted in interest or compromised or repudiated the principal
of their bonds, and Virginia and West Virginia began the dispute
about West Virgioia's share of the ante-Civil War debt of Virginia.
Some of the States for many years were in a condition of chronic
default.
Virginia defaulted in interest July i, 1861.* Previous to the
Civil War, the State had met every liability for principal and
interest "faithfully and promptly." The debt, con-
tracted chiefly for railroads, canals, turnpikes, and
public buildings, was described later as "free from the taint of
extravagance, fraud, or doubt." ' On July i, 1867, after settling
for the back interest with new bonds, the State resumed cash
interest payments at the rate of 4% and issued coupons or cred-
ited registered holders for the remainder of interest due.
January i, 1869, the State again defaulted.* The property of
the people was much reduced, and the task of raising revenue
under the conditions left by the war was not an easy one.® By
January i, 1871, the debt, through accimaulations of interest,
had mounted to $47,390,839.96.® To meet the situation, the legis-
lature passed the Funding Bill of 1871.^ This provided that for
one third of the old debt and interest, except the 5% dollar bonds
and the sterling bonds,* a certificate should be issued payable in
accordance with the settlement made between Virginia and West
Virginia and that for the other two thirds there should be issued
' North American Remew, August, 1884, p. 141.
' Commercial and Financial Chronicle, vol. 13, p. 139.
' North American Review, February, 1882, p. 150. Commercial and Financial
Chronicle, vol. 12, p. 360; vol. 14, p. 175.
* Commercial and Financial Chronicle, vol. 13, p. 139.
' North American Remew, February, 1882, p. 151.
' Commercial and Financial Chronicle, vol. 12, p. 360.
' Acts of Virginia (1870-71), chap. 282.
' The s% dollar bonds were funded in the same way, but with new s% bonds in-
stead of 6%; and the sterling bonds were treated, with certain adjustments, on the
same basis.
STATE BONDS IIS
new 6% bonds payable in thirty-four years. The coupons on the
new or "consolidated" bonds were to be receivable for taxes and
other dues. Under this act there was exchanged something Kke
two thirds of the old debt.^
Then a new spirit came over Virginia's dreams. The so-called
"Readjusters" appeared upon the scene.'' In December, 1871,
they put through the legislature a resolution for discontinuing
the funding of the state debt.' The State failed to pay interest
due in January, 1872, although there were sufficient funds in the
Treasury.* The claim was made that the people were too poor to
take care of the debt — a claim hardly borne out by facts.^ March
7, 1872, the legislature passed over the governor's veto an act *
repealing the receivability of coupons for taxes and other public
dues. The legislature also agreed to pay 4% interest to holders
of the "consolidated" bonds who acquiesced in the repeal of the
tax-receivable feature of the coupons.^ This was the origin of the
class of bonds known as "pealers." * The Supreme Court of Ap-
peals of Virginia, however, held that the State must receive the
coupons for taxes.®
The panic of 1873 prostrated business and diminished the reve-
nues of the State. ^^ In 1874, Governor Kemper in a message to the
General Assembly declared the State imable to fulfill all the con-
ditions of the Fimding Act of 1871.^^ Default was made in interest
January, 1874.^^ In 1879, the legislature passed an act known as
the McCulloch Bill,^* which provided for refunding a part of the
debt with new bonds bearing 3% interest for ten years, 4% for
twenty years, and 5% for ten years. The coupons from these
bonds were to be receivable for taxes. This act was acceptable to
* Commercial and Financial Chronicle, vol. 14, p. 151. Up to December i, 1871,
$21,610,691 consols were issued. (Tenth Census, vol. vn, p. 557.)
* North American Review, February, 1882, p. i$i.
• Commercial and Financial Chronicle, vol. 13, p. 839.
• Ibid., vol. 14, pp. SI and 175. ° lUd., vol. 14, p. 175.
' Acts of Assembly (1871-72), chap. 148.
' Commercial and Financial Chronicle, vol. 14, p. 323.
' See American Law Review, vol. xxm, p. 927.
' Antoni v. Wright, 22 Gratt., 833.
'" North American Review, February, 1882, p. 152.
'1 Commercial and Financial Chronicle, vol. 18, p. 350.
" Ibid., vol. 18, p. 598.
" Acts af Virginia, (1878-79, Special Session), chap. 24.
no AMERICAN AND FOREIGN INVESTMENT BONDS
creditors, and under it a portion of the debt was exchanged for
new " ten-forty dollar bonds." ^
Later, the political complexion of the Government changed,
refimding ceased, and interest on the "ten-forties" was defaulted.*
In 1880, the Supreme Court of Appeals of the State held the Mc-
Culloch law constitutional and the coupons receivable in full for
taxes.' The "Readjusters" triumphed, however, in 1882 with the
enactment of two laws known as the "Coupon-Eallers"* — the
effect of which as interpreted was to prevent the receipt of any
large amount of coupons for taxes — and a law known as the
Riddleberger Act ' for the settlement of the debt. This act, after
leaving to West Virginia provision for one third of the old debt
(1861) or its equivalent, provided for scaling various classes of
the remainder from 20% to 47%.
For many years, the bonds issued under this act were the only
bonds of the State receiving interest in cash. The "consols" re-
ceived no interest in cash and the "pealers" no interest at all from
1874, and the "ten-forties" received no cash interest after July,
1880.^ The bondholders made various unsuccessful attempts to
obtain satisfactory terms.^ Finally, in 1891, after several months
of negotiations, the bondholders and the representatives of the
State arrived at a basis of settlement.* After certain adjustments,
the principal and interest of the state debt July i, 1891, was de-
termined to be $28,616,972.98. The "Olcott Plan," allowing for
a certain amount of bonds as probably lost, assumed the debt to
be in round numbers $28,000,000.® In exchange for this, it pro-
posed to issue $19,000,000 new bonds payable in one hundred
years and bearing 2% interest for ten years and 3% for ninety
years. The coupons were not to be receivable for taxes. The
different classes of bonds fxmded were to receive new "century"
' Up to October i, 1879, there were issued of these $8,049^4.50. {Tenth Census,
vol. vn, p. 559.)
' Seventh Annual Report, Council of the Coiporation of Foreign Bondholders,
p. 66.
' Williamson !i. Massey, 33 Gratt. 237.
* Acts of Assembly (1881-82), chaps. 7 and 41. See Parsons v. Maiye and others,
23 Fed. Rep. 113 (Circuit Court, E. D. Virginia, Feb. 11, 1885).
^ Acts of Assembly (1881-82), chap. 84, approved February 14, 1882.
' Commercial and Financial Chronicle, vol. 56, p. 636.
' See ibid., vol. 44, p. 627. ' Ibid., vol. S7, p. S^S- ' tti^-t vol. 56, p. 636.
STATE BONDS II7
bonds in proportions varying from 60% to 75% of principal
with similar adjustments for interest. This plan was embodied
in an act approved February 20, 1892.^ In December, 1893, Gov-
ernor McEonney stated that $24,547,358 old bonds had been re-
ceived in exchange for new bonds and canceled. Four semiaimual
interest payments had been met promptly.^ Later, the reduction
of the debt was begun through purchases of bonds for the sinking
fund.* The debt history of Virginia since the Civil War has been
a checkered one.
The constitution of West Virginia, adopted in 1863, provided
that West Virginia should assume an "equitable portion" of the
public debt of Virginia as it was before January i, v- • •
1861.* Later negotiations for an adjustment of the
debt were begim between the two States.^ March 30, 187 1, the
legislature of Virginia passed a fimding bill® which provided,
among other things, that one third of the old Virginia debt should
be fimded with certificates payable in accordance with the settle-
ment thereafter made between the two States. Virginia claimed
that $15,239,370.74 properly was chargeable to West Virginia on
the grovmd that the new State contained one third of the terri-
tory and population of the old State.^ West Virginia, on the
other hand, claimed that her share was not over $953,360.23 on
the basis of the net amounts expended and invested in her terri-
tory up to January i, 186 1.* The negotiations dragged on for
years.*
In March, 191 1, however, the United States Supreme Court
held West Virginia liable for a principal debt of $7,182,507.46 and
1 Acts of Assembly (1891-92), chap. 325, as amended by Acts of Assembly (1893-
94), chap, no, and by Acts of Assembly (1897-98), chaps. 113 and 287. See Com-
mercial and Financial Chronicle, vol. 56, p. 802; vol. S7, p. 1053. The time for accept-
ing the Olcott settlement was extended from time to time until December 31, 19 14,
with authority given to the sinking-fund commissioners to extend one year more.
(State and City Section, Commercial and Financial Chronicle, November 21, 1914,
p. 169.)
' Commercial and Financial Chronicle, vol. S7, p. 1053. ' Ibid., vol. 58, p. 357.
* Constitution of West Virginia (1863), ayt. vnc, sec. 8.
' Tenth Census, vol. vn, p. 564.
' Acts of Virginia (1870-71), chap. 282.
' International Review, November, 1880, p. 568. Tenth Census, vol. vn, pp. 564-65.
• Tenth Census, vol. vn, p. 565.
' See Commercial and Financial Chronicle, vol. 56, p. 637; vol. 58, pp. 51 and 444.
Il8 AMERICAN AND FOREIGN INVESTMENT BONDS
left the question of interest for adjustment between the parties.^
The commissioners of the two States again failed to agree.^ In
June, 1914, the United States Supreme Court ordered a special
master to take additional testimony.* On June 14, 1915, the court
sustained in practically every particular the findings of the mas-
ter. Allowing for a net credit to West Virginia as of January i,
1861, of $2,966,885.18 and adding to the principal of the debt
$8,178,307.22 for interest up to July i, 1915, the court held the
total amoimt due by West Virginia as $12,393,929.50. The court
ordered a charge of 5% interest on the total amoimt awarded by
the decree from the date of entry vmtil the debt be paid. It
ordered costs divided evenly between the two States. Whether
the legislature of West Virginia settles in accordance with the
decision of the Supreme Court remains to be seen.*
In 1868, North Carolina settled the back interest on all but its
Civil War debt with new 6% bonds.* The debt had been contracted
„ , „ ,. largely for railroads.® Some of the efforts to give aid
North Carolina i i i. , , . t ■.
resulted dis£istrously, and m other cases the agents
of the State wasted the fimds.^ Governor Caldwell in 187 1 de-
clared that for many of the "special tax" bonds, issued in exchange
for railroad and canal stock, the State received only from ten to
thirty cents in currency on the dollar, and for certain raibroad-aid
bonds, less than fifty cents in specie.® October i, 1876, the total
debt of the State was given as $41,846,930.45. Of this, over
$13,000,000 was impaid interest.^
Governor Vance, in a message to the general assembly in 1879,
claimed that the State was under no moral obligation to pay the
debt at face value. He said: "Quite one haK of our property upon
which our bonds were based, was wantonly destroyed by consent
of a large majority of those who held them. . . ." He declared
that practically all the special tax bonds were "not binding either
* Virginia v. West Virginia, 220 U.S. 1; 31 S.C. 330; SS L-E. 353.
' See Virginia j?. West Virginia, 231 U.S. 89; 34 S.C. 29; 58 L.E. 135.
* Virginia v. West Virginia, 234 U.S. 117. For suromary of report of Master, see
Commercial and Financial Chronicle, vol. loo, p. 414.
* See Commercial and Financial Chronicle, vol. 100, p. 2099.
5 Ibid., vol. 6, p. 748. " Tenth Census, vol. vn, p. 567.
' Commercial and Financial Chronicle, vol. 12, p. 263.
' Ibid., vol. 13, pp. 740-41; vol. 17, p. 803.
' Ilrid., vol. 23, p. S99-
STATE BONDS II9
in law or good morals." ^ An amendment to the State Constitu-
tion ^ was adopted and ratified later by popular vote forbidding
payment of the following bonds unless the proposal to pay them
shaU have been ratified by a majority of aU the voters of the
State: special tax bonds, $11,366,000; Chatham Railroad bonds,
$1,030,000; Williamston and Tarboro Railroad bonds, $150,000;
penitentiary bonds of 1868, $44,000. These bonds still are un-
paid.^
In 1879, the legislature also passed fimding laws ^ providing
substantially as follows: (i) for the issue of 4% bonds due in 1910
to fimd ante-war bonds at 40% of face value, railroad bonds
recognized as vaUd at 25% of face value, and funding bonds of
1866 and 1868 at 15% of face value, nothing being given for over-
due coupons; (2) for the issue of 6% bonds due in 1919 in exchange
for North Carolina railroad construction bonds at par, holders
of construction bonds abating $240 of overdue interest on each
$1000 bond. Various attempts have been made since to enforce
payment of the special tax bonds.^ In 1905, as the result of a de-
cision by the United States Supreme Court,* settlement was made
for a smaU amount of bonds secured by stock of the North Caro-
lina Railroad.^ In 1913, the legislature passed an act ^ authoriz-
ing the payment of a small amount of unfunded bonds in cash at
fifteen, twenty-five, and forty cents on the dollar of principal on
the basis of the Fxmding Act of 1879. The debt history of North
Carolina shows the unfortunate results of a heavy debt incurred
to a considerable extent without value received.
During the CivU War, South Carolina became in arrears in in-
terest.' March 23, 1869, an act ^^ was passed to pro- „ , ^ ,.
, , , 1 ,1 ■ r . . 1) A^i • South Carolina
Vide for the conversion of state securities. Ihis
1 Commercial and Financial Chronicle, vol. 28, p. 69.
'' Constitution of North Carolina (1868, as amended 1879), art i, sec. 6.
' Thirty^inth Annual Report, Council o£ the Corporation of Foreign Bondholders,
p. 366.
* Laws of North Carolina (1879), chaps. 98 and 138.
' See Commercial and Financial Chronicle, vol. 85, p. 1100; vol. 86, p. 121; vol. 90,
p. 249; vol. 92, pp. 477 and 610.
' South Dakota v. North Carolina, 192 U.S. 286 (1904).
' See Commercial and Financial Chronicle, vol. 80, p. 1382.
8 PMic Laws of North Carolina (1913), chap. 131. Cf. ibid. (1879), chap. 98.
• Commercial and Financial Chronicle, vol. 13, p. 622,
'I" Acts of South Carolina (1868-69), no. 159.
I20 AMERICAN AND FOREIGN INVESTMENT BONDS
act provided for funding the old debt and interest with new securi-
ties bearing the same rates of interest as the old. The state debt
history of South Carolina goes back to 1794 and includes the issue
of bonds in aid of banks and railroads.^ After the Civil War, the
State suffered xmder an extreme example of "carpet-bag" gov-
ermnent.^ Much of the State's money was stolen or wasted.*
Apparently bonds were issued largely in excess of the amoimts
authorized by law, and railroad securities were endorsed on a
wholesale scale. According to a report of a committee of the legis-
lature during the session of 1871-72, there had been created
direct and contingent UabiUties amoimting to $28,977,608.20 for
the existence of a large part of which no adequate reason could be
given. The State was declared to be virtually bankrupt.* In
January, 1872, the State again defaulted ia interest.®
In 1873,* the legislature passed an "act to reduce the voliune
of the public debt and to provide for the payment of the same." ^
This act declared void $5,965,000 bonds issued for the conversion
of the State debt, on the ground that these were put on the mar-
ket without authority of law. It provided further that the re-
mainder of the debt should be funded at fifty per cent of its face
value and interest from 1872 into new 6% "green consols." Up
to October 31, 1875, there had been funded, under the Act of
1873, $7,220,512.65 of the old debt.*
At various times, up to 1877, interest on all or a part of the
debt was ia default.' Legislative investigating committees ia
1877 reported $3,608,707 treasury vouchers issued without proper
• Commercial and Financial Chronicle, vol. 12, p. 297.
' Ibid., vol. 13, pp. 622-23. International Review, November, 1880, pp. 576-77.
' The liberality of the I^islature to itself and its friends extended at one time to
having fitted up a room in the State House wherein to serve "wines, liquors, eatables,
and cigars to state officials, senators, members of the House and their friends, at all
hours of the day and night." (Report of the Joint Investigating Committee on Public
Frauds, etc., 1877-78, quoted in Scott, The Repudiation of State Debts [New York
and Boston, 1893], Appendix vi, p. 314.)
* Tenth Census, vol. vn, p. 572.
' Commercial and Financial Chronicle, vol. 18, p. 317.
' The governor in a message referred to the debt of the State, October 31, 1873,
as $15,851,627.35. Tenth Census, vol. vn, p. 574.
' Ads of South Carolina (Special Session, 1873), no. 427.
' Tenth Cemus, vol. vn, p. 575.
» See Commercial and Financial Chronicle, vol. 21, pp. 224, 231, 535, 614; vol. 33,
p. 57; vol. 24, p. 445.
STATE BONDS 121
legal authority and the overissue of $1,000,000 of a loan for the
payment of interest on the public debt. March 22, 1878, there
was established by joint resolution a court of claims, with the
idea of trying to straighten out the state finances.^ In 1879, the
Supreme Court of the State declared illegal certain bonds in-
cluded in the refunding under the Act of 1873.'' Invalidity was
discovered to a considerable extent among the "green consols."^
The final adjustment took place imder an act approved Decem-
ber 24, 1879, and amended February 20, 1880.^ All valid "green
consols" and valid portions were exchangeable at par with in-
terest to July I, 1878, for new "brown bonds" printed from the
same plates.^ A writer in the "International Review" in 1880
held that South Carolina had the best excuse for repudiation of
aU of the States.*
An act ^ was passed in 1871 "to protect the people of the State
of Georgia against the illegal and fraudulent issues of bonds. ..."
Under authority of the state constitution of 1868,
endorsements of railroad bonds were permitted for
not over one half the cost of the road and provided that the State
should have a first lien on the property.* Accordingly, up to March
16, 187 1, the State had endorsed $5,923,000 railroad bonds.® Fur-
thermore, imder the rule of the "carpet-baggers," Georgia was
plunged into debt for all sorts of alleged public improvements.
Later, claims were made of the issue of bonds in excess of the
amount provided by law, of fraud, and of other irregularities.^"
' Tenth Census, vol. vn, pp. S7&-77. Acts of South Carolina (1877-78), Joint Reso-
lution no. 99, p. 669.
2 Walker v. State of Soutli Carolina, 12 S.C. 200 (1879).
' Commercial and Financial Chronicle, vol. 28, p. 18.
* Acts of South Carolina (1879), no. 186. Ibid. (1880, Extra Session), no. 224.
6 December 19, 1904, the United States Supreme Court aflSrmed the decision of
the United States Circuit Court in the case of Lee v. Robinson and declared the
revenue bond scrip of this State to be void. (196 U.S. 64.) Under Act of March 2,
1872, $1,800,000 of this scrip had been issued. (Commercial and Financial Chronicle,
vol. 80, p. 725.) The act was passed over the veto of the governor, March 2, 1872.
(Acts of South Carolina [1871-72], no. 65.)
' International Review, November, 1880, p. 576.
' Georgia Laws (1871-72), no. s-
8 Constitution of Georgia (1868), art. in, sec. vi, sub-sec. $.
' Commercial and Financial Chronicle, vol. 12, p. 360.
" Lalor's Cyclopiedia of Political Science (Chicago, 1884), vol. m, p. 606. See Pre-
amble of Georgia Laws (1871-72), no. $.
122 AMERICAN AND FOREIGN INVESTMENT BONDS
The legislature in 1872 declared void $3,982,000 state bonds
and state endorsements of $4,475,000 railroad bonds.^ An amend-
ment ^ to the constitution in 1877 provided that numerous issues
of bonds never should be paid. The principal of the defaulted debt
of Georgia in 1912, according to the Coimcil of the Corporation of
Foreign Bondholders, was $12,757,000.^ In justice to Georgia, it
must be said that, while her resources probably were sufEident
to take care of her entire debt,^ she suffered in common with other
Southern States through incompetent and dishonest government
in the Reconstruction period.^
Beginning in 1823, Alabama issued its bonds in aid of banks and
other private enterprises. In the early forties, interest on the
state debt was met promptly, though with difficulty.
After November, 1861, interest payable in New
York was defaulted, but interest due in London was paid regu-
larly to January, 1865. Later, the unpaid interest on bonds issued
both in London and in New York was settled with new bonds. A
similar settlement was made for the principal of bonds which
matured in 1863, 1865, and 1866.®
In 1867 and 1868, the legislature passed acts ^ providing for
state endorsement of railroad bonds under certain conditions.
Under this general authority, endorsements were made for $19,-
006,000. The State also issued $2,300,000 direct bonds for rail-
roads.* July, 1872, the State defaulted in interest on bonds and
endorsements in aid of the Alabama and Chattanooga Railroad.'
The road had become bankrupt." In 1873, an act ^^ was approved
' Commercial and Financial Chronicle, vol. 15, p. 411. Georgia Laws (1872),
nos. I, 2, 3, 4, 5.
* Georgia Constitution (1868), art. 3, sec. 6, as amended May i, 1877.
' Thirty-ninth Annual Report, Council of the Corporation of Foreign Bondholders,
p. 366.
' Investors' Supplement, Commercial and Financial Chronicle, July 31, 1875, p. iv.
International Review, November, 1880, p. 578.
' See Commercial and Financial Chronicle, vol. 19, p. 375. Lalor's Cydopcedia of
Political Science, vol. in, p. 606.
' Tenth Census, vol. vn, pp. 590-92.
' 4cto o//4/a6omo (1866-67), no. 641, as amended by iJii. (1868), p. i7;fW(i. (1868),
no. 3. See also ibid. (1869-70), no. 142.
' Tenth Census, vol. vn, p. 593.
' Commercial and Financial Chronicle, vol. 15, p. 14.
" Ibid., vol. 13, p. 739.
" Acts of Alabama (1872-73), no. 21, approved April 21, 1873.
STATE BONDS 1 23
providing for the issue of state bonds in place of state endorse-
ments in the ratio of one to four. The new bonds were to mature
in thirty years and bear 7% interest. The State settled with some
of the railroad companies on this basis.^
In Jvme, 1875, the debt of Alabama was estimated as $31,952,-
000.30, of which $9,691,000 was contingent railroad debt, $4,-
696,407 past-due interest, and $2,500,000 estimated floating
debt.^ The taxable property of the State at this time was about
$159,000,000.' The State was described as in a condition of
"practical insolvency." This was held to be due to the bad effects,
of the war, loss of crops, and loose state and coimty administra-
tions. A Southern newspaper blamed the bondholders for sup-
porting Congress in fastening on the people "that thieving crew'"
who voted away the State's credit "by the cart-load." *
By an act ^ passed in 1876, the debt was "adjusted" to not
over $9,668,423.® There were authorized $7,000,000 new bonds,
bearing interest at 2% for the first five years, 3% for the next five,,
4% for the next ten, and 5% for the final ten years; $1,000,000.
bearing interest at 2% for the first five years and 4% for the next
twenty-five; and $596,000 bearing 5% from the beginning. For
the old general direct debt bearing 5%, 6%, and 8% interest, the-
new 2%, 3%, 4%, and 5% bonds were given dollar for dollar with-
out any allowance for interest; for the 7% state bonds issued in
the ratio of one to four for endorsed railroad bonds, the new
5% bonds were given at the rate of fifty cents on the dollar of
principal, together with a waiver of certain impaid taxes. In ex-
change for the endorsed bonds of the Alabama and Chattanooga
Railroad, amounting to $5,300,000, there were given the $1,000,000.
bonds bearing 2% for five years and 4% for twenty-five years;
for the $2,000,000 state bonds issued direct to the railroad, the
State released its hen on the road and transferred 500,000 acres
of land.' There are at present defaulted loans of the State of
* Tenth Censits, vol. vn, p. 593.
' Commercial and Financial Chronicle, vol. 20, p. 582. ' IhU., vol. 21, p. 276.
* Ibid., vol. 20, p. 582. ' Acts of Alabama (1875-76), no. 38.
' Tenth Census, vol. vn, p. S9S- See also Commercial and Financial Chronicle, vol.
23, p. 622.
' See Third Annual Report, Council of the Corporation of Foreign Bondholders,
pp. 21-22; Fourth Report, pp. 12-17, and Fifth Report, pp. lo-ii. Tenth Census, vol.
vn, pp. S94-9S-
124 AMERICAN AND FOREIGN INVESTMENT BONDS
Alabama, but there are no available records of their amount and
character.^
Tennessee issued bonds in aid of banks as early as 1832. The
State also issued bonds, from time to time, in aid of railroad and
turnpike companies. In April, 1865, the total state
liabiUties, including endorsements but not including
war debt, were given as nearly $20,000,000. Small portions of the
principal of the state debt had matured from 186 1 to 1864 and had
not been paid. The revenues of the State in 1865 were insufficient
to pay current expenses and interest on the debt. A large portion
of the railroad companies to whom bonds were issued did not pay
the interest. From time to time these roads were sold and the
proceeds applied to pajnnent of the bonds.^ In 1865, provision
was made for paying all past-due bonds and interest.'
In 1866, $5,958,000 additional state bonds were authorized in
aid of railroads. The July, 1868, interest on the debt was not met.
In 1868, interest was fxmded. July i, 1869, the total liabilities of
the State were $39,896,504.55. Of this debt a considerable portion
was taken care of through sale of state interests in railroads.*
March 17, 1873, an act^ was approved to fimd the legally issued
bonds and coupons of the State with new 6% bonds.
The July, 1875, interest was not paid.* The State had difficulty
in collecting taxes.^ In 1879, the governor of the State said that
it had been able to pay only three installments of interest in ten
years. He reported the debt, including interest, as $24,274,017.*
An act, approved March 28, 1879, for funding the debt at fifty
cents on the dollar with new 4% bonds, was rejected by popular
vote.^ In 1881, an act was passed funding the debt at par with
new 3% bonds, but this act was declared imconstitutional by the
Supreme Court of the State.^" In 1882, an act was passed funding
the debt at 60% of the principal and interest with new bonds
' Thirtyninth Annual Report, Council of the Corporation of Foreign Bondholders,
P- 365-
' Tenth Census, vol. vn, pp. 604-05. ' Acts of Tennessee (1865-66), chap. K.
* Tenth Census, vol. vn, pp. 605-06. ' Acts of Tennessee (1873), diap. xxiv.
' Commercial and Financial Chronicle, vol. 21, p. 87.
' Ibid., vol. 21, p. 614. ' Ibid., vol. 28, p. 44.
' Seventh Annual Report, Council of the Corporation of Foreign Bondholders,
p. 60.
" Acts of Tennessee (i88i), chap, cixxm. Lynn tr. Polk, 76 Tenn. 121 (1881).
STATE BONDS 125
bearing 3% interest for two years, 4% for two years, 5% for two
years, and 6% for twenty-four years.^ In 1883, the state treasurer
absconded leaving a large deficit. The legislature thereupon re-
pudiated the settlement and stopped the payment of the January
coupons.^
In the same year the legislature passed an act ' scaling certain
portions of the debt 24%, 21%, and 20%, and funding these por-
tions with bonds bearing 6%, $}{%, and 5% respectively, and
scaHng practically all the rest of the debt 50% and funding it at
3% interest. Under an act of 1905,* all unfunded bonds, except
$335)666.66 held by the United States Government, were elimi-
nated from the state debt as of January, 1907.
In the case of Teimessee, there was no reasonable doubt about
the validity of most of its bonds.^ Like many others, the State
incurred a large debt — sometimes for purposes of doubtful value.
The State had a good many misfortimes, including war]and yellow
fever. The condition of the Southern States at one time, according
to the " Conunercial and Financial Chronicle," * called for forbear-
ance. At the same time the treatment of their debts was not such
as to inspire the confidence of investors.
Since the Civil War, Louisiana has had a debt history somewhat
similar to the debt histories of other Southern States. The early
debt of the State included bonds issued for railroads . .
and liabilities incurred in aid of banks and munici-
palities.'' In 1866, the state auditor referred to the great decrease
in taxable property since the Civil War, to the difiiculty of col-
lecting taxes, and to the fact that state currency was receivable
for public dues.^ The legislature of 1866 authorized $997,300
bonds to pay certain bonds and coupons past due.
* Ads of Tennessee (1881-83, 3d Extra Session, 426 General Assembly), chap.
4. P- 6-
' Tenth Annual Report, Councfl of the Corporation of Foreign Bondholders, p. 92.
See Commercial and Financial Chronicle, vol. 36, p. 170. Acts of Tennessee (1883),
chaps, n, iv.
' Acts of Tennessee (1883), chap. Lxxxiv, p. 76. • Ibid. (1905), chap. 393.
' International Remew, November, 1880, p. 585. See Lalor's Cyclopcedia of Political
Science, vol. in, p. 610.
« See Commercial and Financial Chronicle, vol. 28, p. 27, and vol. 29, p. 82.
' See Tenth Census, vol. vn, p. 597. For certain interesting phases of early his-
tory, see North American Review, January, 1844, pp. 137-40.
8 Commercial and Financial Chronicle, vol. 4, p. 233.
126 AMERICAN AND FOREIGN INVESTMENT BONDS
From 1867 to 1871, large amounts of bonds were issued for levees
and in aid of railroads and canals.^ In 1871, certain taxpayers
issued a warning that the legislature was exceeding its powers.^
The total liabilities of the State January i, 1872, amoimted to
$41,733,752.' A considerable amoimt of overdue interest was
paid in 1873. Later, a committee of seven citizens appointed by
the governor reported against the validity of a large part of the
debt, and claimed that for a portion of the remainder the State
had received only from thirty to fifty cents on the dollar.^ In
September, 1874, owing to misgovermnent and impending bank-
ruptcy, the Federal authorities placed General Emory tempo-
rarily in charge of the State Government and property.'
January 24, 1874, a fimding act * had been passed providing for
an issue of "consolidated bonds of the State of Louisiana," pay-
able forty years from January i, 1874, and to bear 7% interest.
These bonds were to be exchanged for all valid bonds at the rate of
sixty cents on the dollar. Under the same date, another act ' was
passed proposing a constitutional amendment to declare the new
consolidated bonds a valid contract between the State and the
holders of the bonds. May 17, 1875, Governor Kellogg, who had
returned to power, signed an act * supplemental to the fxmding
act. The new law declared $14,320,000 bonds, issued mostly for
levees and railroads, "questioned and doubtful." The bonds were
to be passed upon by the courts. Under these acts, there were
funded up to the close of 1878 old bonds amounting to $19,874,666.'
January i, 1879, the State again defaulted in interest.^" The debt
ordinance " of the new constitution of the State, adopted July
' Tenth Census, vol. vn, p. 598.
' Commercial and Financial Chronicle, vol. 12, p. 403.
' Tenth Census, vol. vn, p. 598.
* ComTnercial and Financial Chronicle, vol. 18, p. 62. ' Ibid., vol. 19, p. 283.
" Laws of Louisiana (1874, 3d Leg., 2d Sess.), no. 3. ' Ibid., no. 4.
' Ibid, (187s, Extra Sess.), no. 11. Commercial and Financial Chronicle, vol. 20,
p. S2I.
' Sixth Annual Report, Council of the Corporation of Foreign Bondholders, p. 34.
On a portion of the new bonds, the State was in default July i, 1874, July i, 1875,
and July i, 1876.
"> Commercial and Financial Chronicle, vol. 28, p. 42. Defaults also in 1877 and
1878. (Scott, p. 115.)
" Constitution of Louisiana (1879), art. 1 of debt ordinance. See Laws of Louisi-
ana (1884), pp. 74 and 77.
STATE BONDS IVJ
23, 1879, reduced the interest on the consoKdated bonds to 2%
for five years from January i, 1880, 3% for fifteen years, and 4%
thereafter. Holders of the consolidated bonds were given the
option of exchanging them at the rate of seventy-five cents on the
dollar for new bonds bearing interest at the rate of 4%. This
action, together with the repudiation of various issues of bonds,
was Justified by those who carried it out on the grounds that at
one time the State House had been seized by United States sol-
diers, that the body of men that passed the funding act of 1874
was not a constitutional legislature, and that the bondholders
were mainly Northern capitalists.^ In June, 1882, an amendment
was passed, and later ratified by the people, fixing interest on the
consolidated bonds at 2% for five years from January i, 1880,
and 4% thereafter.^ The Supreme Court of the United States in
March, 1883, held that whether or not the debt ordinance violated
the contract of 1874 and therefore was tmconstitutional, there was
no remedy.' The Council of the Corporation of Foreign Bond-
holders in 1912 listed $5,627,160 Louisiana bonds the principal of
which was in default.'*
The only other State to be discussed in connection with defaults
is Missouri. This State was in default in interest on its railroad
debt from 1861 to 1867. In the early fifties, Missouri
had loaned its credit on a liberal scale for the con-
struction of railroads. In 1859, i860, and 1861, nearly all the
railroads which had debts guaranteed by the State defaulted.
The State became directly responsible for obligations amounting
to $23,701,000, in addition to its previous debt of about $1,000,000.
Later, much of the railroad property was destroyed. Furthermore,
during the Civil War, the State was obliged to incur large addi-
tional indebtedness for military purposes. The state debt proper
and the new military debt were taken care of promptly as regards
interest; and by the end of the war, the principal of the military
debt had been considerably reduced. On January i, 1865, the
' Lalor's Cyclopcedia of Political Science, vol. in, p. 606.
^ Amendment ratified April 22, 1884. See Laws of Louisiana (1882), no. 76, and
ibid. (1884), p. 77.
' Louisiana v. jumel, 107 U.S. 711. New Hampshire v. Louisiana, 108 U.S. 76.
* Thirty-ninth Annttal Report, Coimdl of the Corporation of Foreign Bondholders,
p. 366.
128 AMERICAN AND FOREIGN INVESTMENT BONDS
aggregate state debt was $36,094,908, of which $24,754,000 repre-
sented railroad bonds which the State had guaranteed and old
state bonds issued prior to the Civil War.^
In 1867, the legislature passed an act ^ authorizing a tax of four
mills to be applied to the credit of the state interest fund, and
providing that certain sums received from the United States be
applied to the payment of overdue coupons. The act also provided
for the issue of six per cent funding bonds for the remaining over-
due coupons. In 1874, a further fimding act ' provided for $1,000,-
000 six per cent twenty-year funding bonds to be used from time
to time to pay maturing bonds. So vigorously did Missouri go
about the work of paying its debt that by January i, 1869, the
total debt had been reduced to $21,675,000 and by January i,
1885, to $15,243,000. The debt history of Missoiui is a troubled
but an honorable one.
In the matter of debt histories, mention may be made of three
other States. In 1840 to 1842, the solvency of New York State
was "in great jeopardy." The State had made loans
Summary of a J f J
state debt to raihoads and incurred a large debt for canals. In
"^" ' 1841, Ohio had great difficulty in borrowing money
to continue work on its system of internal improvements. Both
these States, however, always managed to pay promptly interest
and principal of their debts. Massachusetts, during the Civil War,
when gold was at a premium, agreed to pay interest and principal
of all scrip and bonds in gold or silver coin.* AH the other States
of the Union, according to our information, have clear records
for the payment of their debts. The States with longer histo-
ries have had more chances to get into trouble than the yoimger
States, and also have not always had others' mistakes to guide
them. Repudiation has not been confined to the Southern States;
though it must be said that the people of those States have shown,
on the whole, much less responsibility in debt matters than
the people of the North and West. This may be accounted
' See Report, State Auditor of Missouri (1883-84), part n, pp. 40, 74 and 116,
and Tenth Census, vol. vn, pp. 636-37.
' Act approved March 12, 1867 {Laws of Missouri I1867], p. 168), as amended by
act approved March 25, 1868 {ibid. [i868, Adj. Sess.] p. 174).
' Act approved March 30, 1874 {Laws of Missouri [1874], p. 169).
* Tenth Census, vol. vn, pp. S37, 539, 614.
STATE BONDS 129
for partly by the large percentage of negro population in the
South.
Our study of the debt history of the States leads us to the con-
clusion that debts too large compared with the property available
for taxation or debts incurred for purposes not strictly
public^ are dangerous. The people of a State are orVrdoubSff
likely to refuse to pay when they feel unwilling to jangerour^
stand the burden of taxation necessary or when they
feel that they have not had their money's worth for their bonds-
The situation is greatly aggravated by the fact that there is no
adequate legal remedy for bondholders. As long as the Eleventh
Amendment stands, "a sovereign State possesses the royal right of
snapping its fingers in its creditor's face." ^ However, people, even
the most Ught-hearted in debt matters, are willing to pay their
debts and maintain their credit when the debts have been justly
incurred and when they have plenty of resources with which to pay.
The experiences of our States in the creation and payment of
debts have had the salutary effect of causing practically aU the
States of the Union to place in their constitutions EjEperfence has
debt provisions which are, on the whole, extremely caused practi-
conservative. Just as our form of government, fed- states to Umit
eral, state, and municipal, is largely the outgrowth stitutions state
of our colonial experience in government, so the lim- ^ ^''^^ '^
itations in our state constitutions on the creation of debt by the
States are the outgrowth of our early experience in debt-making.
Four States, however (New Hampshire, Vermont, Massachu-
setts, and Connecticut), have no constitutional hmitations what-
ever on the creation of debt. These States have such „
, , Four States
splendid financial records that the necessity of im- have no
posing constitutional restrictions on the debt-making Umitations"
power of the legislatures never has been strongly felt.
The present constitutional provisions in regard to the debt-
' There is developing at the present time in Canada an interesting situation and
one which bears a striking resemblance to the situation in the United States before
1840. The Dominion Government has guaranteed bonds of the Canadian Northern
and Grand Trunk Pacific Railways. The situation of the companies is such that the
Government may be called on to make good its guarantee and the economic and
financial condition of Canada makes this problem full of interest. (See Boston Even*
ing Transcript, January 11, 1915.)
* Lalor's Cyclopcedia of Political Science, vol. m, p. 613.
I30 AMERICAN AND FOREIGN INVESTMENT BONDS
creating power of the remaining States of the Union are grouped
, ,. about five principal considerations: —
Leading consti- ... . , ,. . . ,
tutionai provi- (i) Pemussion to Dorrow Without limit for the pur-
sions governing ^ „. . . . • ..
creation of posc of repelling mvasion, suppressmg insurrection,
state debts ^^ defending the State in time of war.
(2) Permission to borrow, usually limited to a small amount,
for the purpose of meeting casual deficiencies in revenue.
(3) Permission to borrow for some special purpose definitely
stated in the act authorizing the loan, provided that arrange-
ments are made in the act for paying the interest and prin-
cipal of the bonds and provided in many cases that the act
authorizing the loan is ratified by a vote of the people.
(4) Permission to issue bonds or notes to refimd existing debt.
(5) Prohibition against loaning the credit of the State to private
enterprises, engaging in works of internal improvement, or
loaning credit to political subdivisions.
The above provisions may be said to be the standard constitu-
tional arrangements about the creation of debts by States.^
The provision permitting unlimited borrowing in case of in-
vasion, insurrection, or war obviously is necessary and advan-
tageous. If a State cannot protect itself against
Invasion, . » . ^ • ^ • 1 j j
insurrection, mvasion, Or Cannot mamtam law and order, or even
is imable to assist the National Government in time
of need, its very existence is threatened.
The provision allowing a State to issue bonds or notes up to a
small amoimt to take care of casual deficiencies in revenue or
defid n ^^^^ imcxpccted emergencies is simply precaution-
cies and other ary. The amount which a State may borrow on this
emergencies |ja,sis should be and usually is limited very strictly.
These loans are in their very nature temporary and are paid
usually out of revenues as received.^
' For examples of fairly representative constitutional debt provisions, see Constitu-
tion of New York (1894), as amended, art. vn, sees. 1-4, as amended in November,
1909, and art. vn, sec. 12; Constitution of Ohio (1851), as amended September, 1912,
art. vm, sees. 1-5, and art. xn, sec. 6; Constitution of Virginia (1902), art. xin, sees.
184, 185, and 187; Constitution of Utah (1895), as amended, art. xiv, sees, i, 2, and
6; Constitution of California (1879), as amended, art. rv, sees. 22, 31; art. xn, see. 13;
art. XVI, sec. i.
* The constitution of Missouri (1875) provides that such loans shall be paid with-
in two years. (Art. iv, sec. 44.)
STATE BONDS 13 1
The provision allowing a State to borrow for some definite piece
of work, provided arrangements are made in the act for the pay-
ment of the loan and provided the people approve „ ^^.^ j^^
the creation of the debt, is not foimd in all the state definite purpose
..^ ,. -r. • 1 /■ • 1 when authorized
constitutions. It is, however, a fairly common pro- by vote of the
vision. It is imder this authority granted by its con- ^°^ *
stitution that the State of New York has borrowed large sums on
long-term bonds for highways and canals. It is a provision which
in the case of any people not naturally careful about the creation
of debt may be Uable to a good deal of abuse.
Prohibition against using the credit of the State in aid of private
enterprises, which is found in almost all the consti- „ , ., . .
.,.,,. , r 1 1 • Prohibition
tutions/ is the direct result of the early experience against loan-
of the States in debt-making. "^ "^
In the constitutions of some of the States there are fovmd special
provisions about the proportion of debt to assessed valuation,
about the form of votes for authorizing debt, about ^ . ,
Special con-
the length of time which bonds shall have to run, stitutionai
and various other matters. Sometimes special pro- p'""^'""^
vision is made for specific issues of bonds, as in the case of Cali-
fornia ^ for the Panama Pacific Exposition.
The constitution of North Dakota * provides for the certifica-
tion by the auditor and secretary of state on all state bonds that
the same are issued pursuant to law and within the LegaUty
debt limit. In view of the fact that a State may °f'^'"*
refuse to pay its debt, whether legally issued or not, the question
of legality is not as important in state bonds as in mimicipal
bonds. It should, however, always be taken into consideration.
This is attended to usually by obtaining the opinion of competent
lawyers.
A careful study of the constitutional provisions of all the
States in regard to the creation and payment of debts Substantial
shows a substantial agreement on what is sound creation and
and wise. The provisions have almost a monotonous ^ta^^leto
imiformity.
> Contra, see Constitution of Rhode Island (1842), art. iv, sec. 13.
' Constitution of California (1879), art. iv, sec. 22, as amended November 8, 1910.
» Constitiaion of North Dakota (1889), art. xn, sec. 187.
132 AMERICAN AND FOREIGN INVESTMENT BONDS
On the whole, the States of our Union, since the early days of
the rage for so-called internal improvements and since the Civil
War and carpet-bag periods in the South, have been
Financial sta- ,. , r , , . ,
biiity depends exceedingly careful about creating and very consaen-
e peop e ^-Jqus about paying debts. The frequent amendments
to the constitutions of some of our Western and Southern States,
however, show that in the last resort the only reliable safeguard
against the creation of excessive debts is the disposition of the
people themselves.
Another important class of considerations in estimating the
credit of our States is concerned with population. The amoimt of
population and the increase of population in a State,
thfstatef and ^s showing its size and growth, are important. Table
£*same°"^^^ ^ (°^ pa^gc 133) gives the population in 1900 and in
1910 and the percentage of increase from 1900 to
1910 of all our States.^
Table A shows the greatest percentage of increase in population
in the States of North Dakota, Oklahoma, Idaho, Nevada, and
Washington and the smallest percentage of increase in New Hamp-
shire, Vermont, Iowa, and Missouri. The credit of the respective
States mentioned, however, shows how dangerous is the taking of
any one factor by itself as decisive in determining the credit of
a State.
The character of the population is a far better test of credit.
Population Table B (on page 134) shows the percentage of white,
by color uegro, and all other races to total population in all
our States in 1900 and 1910.*
Table B shows the States of Maine, New Hampshire, Vermont,
Michigan, Wisconsin, Mionesota, Iowa, and Nebraska all with a
population 99% or over white. On the other hand, it shows the
States of South Carolina and Mississippi with a white population
of less than 45% of the whole; the States of Georgia, Florida, Ala-
bama, and Louisiana with a white population of only between
50% and 60%; and the States of Virginia and North Carolina
with a white population between 60% and 70%. These figures
are interesting when taken in connection with the debt histories
of the various States.
» Thirteenth Census, Population, vol. i, pp. 30, 3*. • Ibid., vol. i, pp. 147-53.
STATE BONDS
TABLE A
133
State
Population
igoo
igio
Per cent
of increase
•igoo-io
Alabama
Arizona
Arkansas
California
Colorado
Connecticut. . . .
Delaware
Florida
Georgia
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts. ,
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire .
New Jersey
New Mexico. . ..
New York
North Carolina. .
North Dakota. . ,
Ohio
Oklahoma
Oregon
Pennsylvania. . .
Rhode Island . . .
South Carolina..
South Dakota. . .
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia. . .
Wisconsin
Wyoming
1,828,697
122,931
1.311.S64
1,485,053
539,700
908420
184,735
528,542
2,216,331
161,772
4,821,550
2,516,462
2,231,853
1,470,49s
2,147,174
1,381,625
694,466
1,188,044
2,805,346
2,420,982
1,751,394
1,551,270
3,106,665
243,329
1,066,300
42,335
411,588
1,883,669
195,310
7,268,894
1,893,810
319,146
4,157,545
790,391
413,536
6,302,115
428,556
1,340,316
401,570
2,020,616
3,048,710
276,749
343,641
1,854,184
518,103
958,800
2,069,042
92,531
2,138,093
204,354
1,574,449
2,377,549
799,024
1,114,756
202,322
752,619
2,609,121
325,594
5,638,591
2,700,876
2,224,771
1,690,949
2,289,905
1,656,388
742,371
1,295.346
3,366,416
2,810,173
2,075,708
1,797,114
3,293,33s
376,053
1,192,214
81,87s
430,572
2,537,167
327,301
9,113,614
2,206,287
577,056
4,767,121
1,657,15s
672,765
7,665,111
542,610
1,515,400
583,888
2,184,789
3,896,542
373,351
355,956
2,061,612
1,141,990
1,221,119
2,333,860
145,965
16.9
66.2
20.0
60.1
48.0
22.7
95
42.4
17-7
101.3
16.9
7-3
03
ISO,
6.6
19- ft
6.g
9.0.
2Q.0
16. I
i8.s
15.8
6.0,
54- S
II. 8.
93-4
4.6
34-7
67.6
25-4.
»6.S,
80.8
14.7
109.7
62.7
21.6
26.6
13- 1
45-4
8.1
27.8
34-9
3-6
II. 2
120.4
27.4
12.8
S7.7
134 AMERICAN AND FOREIGN INVESTMENT BONDS
TABLE B
State
Alabama
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts . . . .
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire. . .
New Jersey
New Mexico
New York
North Carolina. . .
North Dakota
Ohio
Oklahoma*
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
White
Negro
Indian, Chinese,
Japanese and others
jgoo
xgio
jgoo
igio
igoo
igio
S4-7
57- S
4S-2
42. s
(1)
(i)
7S-6
83.9
i-S
1.0
22.9
IS. I
72.0
71.8
28.0
28.1
(I)
(I)
94S
9SO
0.7
0.9
4.8
4.0
98.0
98.0
1.6
1-4
0.4
O-S
g8.2
98.6
1-7
1-4
0.1
0.1
83.4
84.6
16.6
iS-4
(i)
(i)
S6.3
S8.9
43-7
41.0
0.1
(i)
S3-3
54-9
46.7
4S1
(i)
(r)
9SS
98.0
0.2
0.2
4-3
1.8
g8.2
98.0
1.8
1.9
(i
(i)
97-7
97-7
2-3
2.2
¥\
(r)
99-4
99-3
0.6
0.7
(i)
(i)
963
96.7
35
3-2
0.1
0.2
86.7
88.6
13-3
11.4
(i)
(i)
S2.8
S6.8
47-1
43- 1
0.1
0.1
99-7
99-7
0.2
0.2
0.1
0.1
80.2
82.0
19.8
17.9
(i)
(i)
98.7
98.8
I.I
I.I
0. 1
0.1
99.1
99.1
0.7
0.6
0-3
0.3
99.2
99.2
0.3
03
O-S
o.S
41-3
43-7
S8.S
56.2
0.2
0.1
94-8
95- 2
S-2
4-8
(i)
(i)
93-
9S-9
0.6
OS
6.4
3.6
99.1
■99.0
0.6
0.6
0.3
0.4
83.6
90.7
0.3
0.6
16. 1
8.7
99.8
99.8
0.2
0.1
(i)
(1)
96.2
96.4
3-7
3-5
0.1
0.1
923
93- 1
0.8
O-S
6.9
6.4
98. S
98.4
1-4
r S
0.2
0.1
66.7
68.0
33-
31.6
03
0.4
97-7
98.8
0.1
0.1
2.2
I.I
97-7
97.6
2-3
2-3
(i)
(i)
84.8
87.2
7.0
8.3
8.2
4.S
9S-4
97-4
03
0.2
4-3
2.4
97- S
97-4
2.S
2.S
0.1
(1)
97.8
98.1
2.1
1.8
0.1
0.1
41.6
44.8
S8.4
SS-2
(i)
(1)
94.8
96.6
O.I
O.I
S-i
3-3
76.2
78.3
23.8
21.7
(1)
(i)
79.6
82.2
20.4
17.7
(i)
(i)
98. S
98.2
0.2
0.3
V3
I-5
99-7
99- S
0.2
O-S
(i)
(i)
64-3
67.4
3S.6
32.6
(i)
(I)
95. 8
97.1
o.S
o.S
3-7
2.3
9S-S
94-7
45
S-3
(i)
(i)
99- S
99.4
0.1
0.1
0.4
0.4
96.2
96.1
I.O
^•S
2.7
2.3
(i) Less than one-tenth oi 1%.
* Includes Indian Tenitoiy for igoo.
STATE BONDS
TABLE C
135
State
Percentage of
illiterates lo years
and over
igoo
igio
Class
Percentage of
persons from
6 to 20 years
attending school
ipzo
Alabama 34.0
Arizona 29.0
Arkansas 20. 4
California 4.8
Colorado 4.2
Connecticut s- Q
Delaware 12.0
Florida 21.9
Georgia 30.5
Idaho 4.6
Illinois 4.2
Indiana 4.6
Iowa 2.3
Kansas 2.9
Kentucky 16.
Louisiana 38.
Maine 5.
Maryland 11.
Massachusetts.... 5.
Michigan 4.
Minnesota 4.
Mississippi 32.
Missouri 6.4
Montana 6.1
Nebraska 2.3
Nevada 13.3
New Hampshire. . . 6.2
New Jersey S- 9
New Mexico 33. 2
New York 5.5
North Carolina ... 28. 7
North Dakota S-6
Ohio 4.0
Oklahoma' 12. i
Oregon 3.3
Pennsylvania 6. i
Rhode Island 8.4
South Carolina. ... 35 . 9
South Dakota. .. . S-o
Tennessee 20.7
Texas 14. S
Utah 31
Vermont S-S
Virginia 22.9
Washington 3.1
West Virginia 11.4
Wisconsin 4.7
Wyoming 4.0
22.9
20.9
12.6
3-7
3-7
6.0
8.1
13-8
20.7
2.2
3-7
31
1-7
2.2
12. 1
29.0
4-i
7-^
S-
3-
3-
22.
4-
4-
1.9
6.7
4.6
S-6
20.2
SS
18. s
31
3-2
5-6
1.9
S-9
7-7
2S-7
2.9
13-6
9.9
2S
3-7
IS-2
2.0
8.3
3.2
3-3
Negro
Si-4
Indian
S3-4
Negro
58. 7
Foreign-bom white
65.0
Foreign-bom white
68.4
Foreign-bom white
64- S
Negro
60.9
Negro
S2.7
Negro
Si-Q
Foreign-bom white
69.0
Foreign-bom white
634
Native white
66.0
Foreign-bom white
69.6
Foreign-bom white
70.6
Native white
61.0
Negro
43- 1
Foreign-bom white
67.7
Negro
S8-4
Foreign-bom white
66.7
Foreign-bom white
67-7
Foreign-born white
68.4
Negro
60.2
Native white
65.1
Foreign-bom white
64.7
Foreign-bom white
69.9
Indian
62.9
Foreign-bom white
65.8
Foreign-bom white
62.2
Native white
61.0
Foieign-bom white
63-7
Negro
61.3
Foreign-bom white
64.1
Foreign-bom white
66.1
Native white
67.8
Foreign-bom white
66.8
Foreign-bom white
62.3
Foreign-bom white
61.0
Negro
51.6
Incian
66.7
Native white
S9-4
Negro
S8.o
Foreign-bom white
70.2
Foreign-bom white
70.6
Negro
56. 3
Foreign-bom white
66. s
Native white
65.5
Foreign-bom white
66.2
Foreign-bom white
64.3
> Includes population of Indian Teiritoiy for igoo.
136 AMERICAN AND FOREIGN INVESTMENT BONDS
Another question to be considered is the intelligence or ignorance
of the population. Table C (on page 135) shows the percentage of
statistics as illiterates of ten years of age or over for 1900 and
to uteracy 1910, the class of population from which a majority
of the illiterates is drawn, and the percentage of persons between
the ages of six and twenty attending school in 1910.^
Table C shows the States of Iowa, Nebraska, and Oregon
with less than 2% of illiterates and the States of South Dakota,
Kansas, Utah, Idaho, and Washington with only between 2%
and 3% illiterates, whereas it shows the States of South Carolina
and Louisiana with over 25% illiterates and the States of Georgia,
Alabama, Mississippi, New Mexico, and Arizona with over 20%
iUiterates. Table C shows further that the largest class of illiter-
ates in the States where illiteracy is greatest, with the exception
of New Mexico and Arizona, is negro. The table further shows
a school attendance of over 70% in the States of Vermont,
Kansas, and Utah and of less than 60% in the States of Mary-
land, Virginia, South Carolina, Georgia, Florida, Alabama, Ten-
nessee, Louisiana, Arkansas, Texas, and Arizona. All these figures
throw light on the debt histories of many of our States. It is a fact
to be noted that in every State but Connecticut and New York,
where the illiteracy is very smaU an3rway, the percentage of iUite-
rates in 1910 is less than in 1900.
There remains in discussing state bonds only one other broad
class of considerations. These are what we will call general con-
General con- siderations — such as the size of the State in territory,
lS^''s°i5et|°''" t^s amoimt of developed and undeveloped resources,
of state bonds the locatiou of the State as regards water and rail
facilities, and other similar considerations. Any intelligent person
can arrive at a fairly soimd conclusion along these lines by observ-
ing the geographic positions of the various States, by looking up
the reports of their manufacttires, by examining the statistics of
bank clearings and postal receipts, and by obtaining other general
information of a similar character.
As illustrations of what we mean by general considerations
Examples of favorably affecting the credit of States, we may
^^^ say that the State of New York, for instance, with
• Thirteenth Census, Population, vol. i, pp. 1108, 1214-18, 1230.
STATE BONDS 137
its large and fertUe territory settled with an unusual number of
important cities, its great harbor on the Atlantic Ocean at New
York City, its access to the Great Lakes and its splendid railroad
connections with the West, is unusually fortunate; that likewise
the State of Illinois, bordering on Lake Michigan and located
almost in the center of the great Mississippi watershed, with its
immense annual production of wealth from the soil, is fortunate;
that so is Texas, with an area large enough and resources large
and varied enough to enable it, perhaps, to support the entire
population of the United States within its borders; that likewise
California is fortimate, with its great area, fine harbors, and ad-
vantageous position with regard to the Panama Canal.
Li summing up the factors bearing on the credit of States, we
wish again to lay emphasis on the following: (i) The proportion
of net debt to the assessed valuation and to the true
value of property and also the proportion of the debt factors bearing
to the population; (2) the debt history of the State or °° "'^'^ "^""^
its record of good or bad faith; (3) the present constitutional provi-
sions regulating the creation and payment of debt; (4) theamoimt
and character of the population; and (5) general considerations
bearing on the present prosperity and future growth of the State.
On the whole, it is probably fair to say that to-day the legally
issued obligations of our best States rank next in safety to the
obligations of our National Government. The States, obligations of
broadly speaking, have reserved, and, as far as pos- ""L*'^' ^ '*''''
sible, should reserve, for emergencies the high credit safety to ob-
which they have built up through years of successful the National
administration of state finances and through lessons ^o^^™"^"*
of still earlier years learned at great cost.
One thing more remains to be said. The prices of our state bonds
over a long course of years have reflected not only the individual
credit of the various States, but also, like aU other „ .
. . . Prices of
bonds, the pnce of capital at any given time, m state bonds
1872, we find bonds of such States as Rhode Island, ^ ' ^^"
Ohio, and Michigan quoted to yield around 6% net income.^ In
1882, we find bonds of Rhode Island, New York State, Ohio,
Michigan, and Missouri selling to yield roughly between 4% and
' Commercial and Financial Chronicle, vol. 14, p. 17.
138 AMERICAN AND FOREIGN INVESTMENT BONDS
4.50%.! During this period the bonds of the Southern States sold
at all kinds of prices — from ^ of 1% for South Carolina 6 per
cents in 1878, 1% for North Carolina special tax bonds in 1879,
and 1% for Arkansas raiboad-aid 7 per cents in 1884, to 117%
for Missouri 6 per cents in 188 1 and 180% for North Carolina
railroad bonds in 1889 ^ — the price of any given issue being based
upon whether interest was being paid on the bonds, whether the
principal was questioned, whether there was a large amoimt of
accrued interest provided for in some settlement and other similar
considerations. In 1892, we find bonds of New Hampshire offered
to yield about 3.25% and of Missouri quoted to yield 3.50%.* In
1902, we find offerings of State of Massachusetts bonds to yield
from 2.95% to 3.05%, of Rhode Island bonds to yield about 2.70%,
of New York State bonds to yield from 2.55% to 2.63%, of Indiana
bonds to jdeld about 3.10%, of Tennessee bonds to yield from
3.20% to 3.25%, and of Mississippi bonds to yield about 3.50%.''
Lastly, in 1912, we find offerings of State of Massachusetts taxable
bonds to yield from 3.80% to 3.85%, State of Connecticut bonds
to yield about 3.82%, and State of New York bonds to yield from
3.90% to 3.95%-^ These quotations show some of the fluctuations
in the price of capital, as weU as the credit at different times of
some of our States.
The great European war has affected the prices of state bonds
War prices vcry slightly. We give below prices of four issues of
state bonds in July, 1914, and in July, 1915: —
of state bonds
July, iQisi
Massachusetts taxable registered 3J per cents}
New York State 4 per cents, 1961
Virginia funded debt 2-3 per cents, 199 r
CaUfomia 4 per cents §
92.51,
lOO^IOlJ
84} sale
97-31
* Commercial and Financial Chronicle, July 4, igi4, p. 32. t Ibid., July 3, 1915,
X Dealers'lists, July, 1914, and July, 1915. Prices 01 a twenty-year 3j% bond reduced from b
(3-05% and 4.05%).
§ Dealers* lists, July. 1914, and July, r9is. Prices of twenty-year 4% bonds (4.20% basis).
p. 34-
Lsis puces
'■ Commercial and Financial Chronicle, vol. 34, p. 24.
' See the Financial Review (Annual, i9is)> PP- 96~97-
• Dealers' lists, January, 1892. * Dealers' lists, January, 1902,
' Dealers' lists, January, 19 12.
STATE BONDS
139
These show changes during the year so small as to be unimpor-
tant.
State bonds, as remarked earlier in this chapter, as a rule are
nothing more than promises to pay. These promises vvaimgness
are not in the last resort enforceable by suit. The
willingness, therefore, as well as the ability, of the
people of the State to honor their obligations is of
the first importance.
of the people
to pay state
bonds is per-
haps the most
important
factor in safety
CHAPTER IV
COUNTY, MUNICIPAL, AND DISTRICT BONDS
County bonds are the direct obligations of counties. Municipal
bonds, strictly speaking, are bonds of cities and towns only. In-
cluded in this term very often, however, are bonds
dpai and dis- issued by school, park, drainage, and fire districts and
trict bonds are .■, . . • , ,. t n at. t_
payable out Other quasi-mumapal corporations. In all the above
of taxes cases, the bonds are payable out of taxes levied on all
the property within the county, municipality, or district issuing
the bonds.'
Furthermore, a county, mimicipality, or district, unlike a State,
can be sued without its own consent. In case of failure to pay inter-
The means of ^^^ °^ principal, bondholders can bring suit asldng for
recovery on de- a levv of taxes. In Certain States, such as Maine,*
faulted county, i. i. <.•.«• a i r^ • k
municipal, and New Hampshire,' Massachusetts,* and Connecticut,*
are faW™ ^ bondholders have the legal right to seize the property
complete ^j ^^ ^^^ inhabitants in execution of the judgment of
a court ordering payment of defaulted municipal bonds.
Aside from this question of legal remedy, the lead-
goveming safety ing Considerations determining the safety of county,
those in case of municipal, and district bonds are similar to the con-
state bonds siderations governing the safety of state bonds. In
other words, these factors are of first importance: —
(i) The debt statement, or the net debt compared with the
assessed valuation and with the true value of property.
' There is a class of bonds known as special assessment bonds which are payable
out of taxes levied on abutting property. These are not in any legal or true sense
municipal bonds.
* Revised Statutes, chap. 47, sec. 96, and chap. 86, sec. 30. Eames v. Savage, 77
Maine, 212 (1885).
• Public Statutes of New Hampshire, chap. 234, sec. 8.
" Hawkes v. Kennebec County, 7 Mass. 461, 463 (1811). Chase v. Merrimack
Bank, 19 Pick. (Mass.) 564, 569 (1837). Gaskill ». Dudley, 6 Met. (Mass.) 546 (1843).
Hill V. Boston, 122 Mass. 344, 349 (1877).
' Beardsley v. Smith, 16 Conn. 368 (1844).
COUNTY, MUNICIPAL, AND DISTRICT BONDS I4I
(2) The constitutional and statutory provisions in regard to the
creation and payment of debt.
(3) The record of good or bad faith.
(4) The amoiint and character of the population.
(5) The location, prosperity, and chances for growth of the
community.
As a matter of law and of practice, the proportion of net debt —
which is usually taken to mean the gross debt less the general sink-
ing fimds, the water debt, and sometimes debt created ^he proportion
for income-producing property other than waterworks °^ °^t debt to
'^ oir r J ^ assessed valu-
— to the assessed valuation vanes considerably m the ation varies
different States. If it is safe to speak of any definite fn the Cerent
figure as the normal proportion of net debt to assessed ^^'^
valuation, we may take possibly 5%. The methods of figuring net
debt for municipalities in the different States vary so much, how-
ever, that this figure can be considered nothing more than an arbi-
trary standard. It is safe to say that a net debt (meaning here a
debt the real burden of which is on the taxpayers) of 1% of the
assessed valuation is small and a net debt of 10%
J 111 Debt less
dangerously large. ^ sinking-fund
We give below the total debt— including debt for J^nlargLt^
waterworks and other productive purposes, but less u^^^^V^!
sinking-fund assets — of the ten largest cities in the
United States.*
City
Debt, less sinking-
fund assets, igi3
Dd)t, less sinking-fund
assets per capita
New York City, New York
Phikdelphia, Pennsylvania
$862,743,861
100,960,972
81,699,819
75,676,830
46,326,458
41,829,001
36,539,920
28,365,058
22,854,668
10,513,076
$165.95
61.87
34.85
Boston Massachusetts
104.75
Baltimore A/fa.rvlanH
80.63
Cleveland. Ohio
67.17
65.51
Buffalo New York
63.47
31.60
20.19
* For assessed valuation of counties and of incorporated places having a popula-
tion of 2500 and over, and for net debts of coimties and of incorporated places, see
Wealth, Debt, and Taxation, IQ13, vol. i, pp. 348, 398, 752, 841.
» Ibid., pp. 405, 414. 41S. 417. 420, 425, 429. 433-
142 AMERICAN AND FOREIGN INVESTMENT BONDS
This table shows New York City with by far the largest per
capita debt and Detroit with by far the smallest.
Modifying in most States, to a great extent, the significance of
the net debt of any one municipal corporation is the practice of
The significance issuing bonds by Several different corporations cover-
°f a miSci'^aBt ™S Substantially the same territory and levying taxes
often is modi- for the payment of their bonds on practically the same
tence of quasi- property. We find bond issues, by school districts in
CT^ing ^ ' over thirty States including New Hampshire, New
corporations york, Illinois, Utah, South Carolina, and Texas; by
water districts in Maine and Massachusetts; by fire districts in
New Hampshire, Massachusetts, Rhode Island, and Connecti-
cut; by road districts in Ohio, Mississippi, Louisiana, Arkan-
sas, and Texas; by park districts in Illinois and Missouri; by
drainage districts in Illinois, Wisconsin, Iowa, Nebraska, Okla-
homa, North Carolina, and Texas; by irrigation districts in Mon-
tana, Colorado, and California; and by levee districts iu Mississippi,
Louisiana, and Arkansas.^ The State of Missouri contains, besides
the coxmties and cities, at least four different kinds of debt-creating
quasi-municipal corporations — namely, school, park, road, and
drainage districts; and the States of Mississippi, Louisiana, Ar-
kansas, and Texas contain four kinds — namely, school, road,
drainage, and levee or "navigation" districts. In addition to the
above, we find in Connecticut especially and to some extent in
New York state bond issues by two and sometimes three different
municipal or quasi-municipal corporations covering practically the
same territory and called cities, towns, boroughs, and villages.^
A s% muni- ^ vi^w of thcse facts, it is obvious that a net debt
Stet'e lik'e '"'' °^ S% for a municipality in a State like Massachu-
Massachusetta sctts, wherc the Issue of bonds by districts is com-
may be less of . •ii-tt,
a burden on paratively rare, is less of a burden on the commimity
ity than a than a net debt say of 3% for a dty in some State
dfbt'i^stat ^^ Illinois, where there may be also a 2% or a 3%
like Illinois (jgbt fgj. ^ drainage district covering practically the
' These are simply examples and do not include all the States having such dis-
tricts.
' State and City Section of the Commercial and Financial Chronide, May 29,
191S, passim. In the State of Washington there is a corporation, distinct from the
dty of Seattle, called the Port of Seattle, which has issued bonds. (See Und., p. 168.)
COUNTY, MUNICIPAL, AND DISTRICT BONDS I43
same territory as the city and possibly a 2% or a 3% debt issue
by park districts within the city limits.'
Consideration of the proportion of debt to property in our muni-
cipalities leads to the question of the constitutional and statutory
provisions of the various States in regard to the issue constitutional
of bonds by counties, mimicipalities, and districts, and statutory
■' ; jT ; provisions m
Perhaps the best way to treat this phase of the subject regard to
• t • J -Ji ^u 1 t li. local debt
IS to summarize and compare with the laws of other
States the recently enacted legislation of Massachusetts governing
municipal finances.*
The leading provisions of the Massachusetts laws xhe Massa-
goveming the creation of local debt are as follows: — <i"isett3 laws
1. Except when authorized by law for certain purposes, to be enumer-
ated later, and except for the purpose of paying Debt limit
certain demand notes or restoring trust fimds, no for cities
city of Massachusetts shall authorize indebteiiess ^ ^""^^
to an amount exceeding 2^% and no town to an amount exceed-
ing 3% of the average assessed valuation of taxable property for
the three preceding calendar years.* Purposes of
2. Cities and towns may incur debt within the limit of '^^"^ ^°"J ""^
indebtedness prescribed above for the following pur- gations within
poses and payable within the periods stated below: '^''" ^^^
1 In this connection there is. an interesting provision in the constitution of South
Carolina as follows: that "wherever there shall be several political divisions or
municipal corporations covering or extending over the same territory or portions
thereof, possessing a power to levy a tax or contract a debt, then each of such political
divisions or municipal corporations shall so exercise its power to increase its debt
under the foregoing eight per cent limitation that the aggregate debt over and upon
any territory of tUs State shall never exceed fifteen percentum of the value of all
taxable property in such territory as valued for taxation by the State: Provided that
nothing herein shall prevent the issue of bonds for the purpose of paying or refunding
any valid mimidpal debt heretofore contracted in excess of eight percentum of the
assessed value of all the taxable property therein." {Constitution of South Carolina,
art. X, sec. 5.)
' Acts 1913, chap. 719, as amended by Acts 1914, chaps. 143 and 317; Acts igis,
chap. 648; Acts jgi3, chap. 634; Acts igi3, chap. 677; Acts igz3, chap. 727, as amended
by Acts IQ14, chap. sS't -^ci^ 1910, chap. 616, as amended by Acts igi2, chaps. 45
and 49; Acts igi3, chap. 416; Acts igog, chap. 490, part i, sec. 5, cl. 15, as amended
by Acts igi4, chap. 83; Acts igio, chap. 379.
' Acts igi3, chap. 719, sec. 12; Acts igi3, chap. 634.
Coimties in Massachusetts, except Suffolk and Nantucket, cannot borrow, except
in anticipation of taxes, without special permission of the Legislature. (Revised Laws,
chap. 21, sec. 39, as amended by Acts igi'4, chap. 386.) Fire, water and watch dis-
tricts are similarly limited. (Acts igij, chap. 719, sec. 3.)
144 AMERICAN AND FOREIGN INVESTMENT BONDS
(i) For the construction of sewers for sanitary and surface
Sewers drainage purposes and for sewage disposal, thirty years.
(2) For acquiring land for public parks under the provisions of
Parks chapter 28 of the Revised Laws and amendments therepf,
thirty years.
(3) For acquiring land for, and the construction of, schoolhouses
School- or buildings to be used for any municipal or departmental
houses purpose, including the cost of original equipment and fur-
nishing, twenty years.
(4) For the construction of additions to schoolhouses or buildings
to be used for any municipal purpose, including the cost of
Additions to original equipment and furnishings, where such additions
buUdi^s increase the floor space of said buildings to which such ad-
ditions are made, twenty years,
(s) For the construction of bridges of stone or concrete, or of
Bridges iron Superstructure, twenty years.
(6) For the original construction of streets or highways or the
Streets extension or widening of streets or highways, including land
damages and the cost of pavement and sidewalks laid at the
time of said construction, ten years.
^"' . (7) For the construction of stone, block, brick, or other per-
manent^'' ...,,. , ' ^
pavements manent pavement of similar lastmg character, ten years.
(8) For macadam pavement or other road material under specifi-
Temporaiy cations approved by the Massachusetts Highway Commis-
pavements sion, five years.
Walls (g) YoT the construction of walls or dikes for the protection of
dikes highways or property, ten years.
(10) For the purchase of land for cemetery purposes, ten
Cemeteries years.
(11) For such part of the cost of additional departmental equip-
Depart- ment as is in excess of 25 cents per $1000 of the preceding
equipment year's valuation, five years.
(12) For the construction of sidewalks of brick, stone, concrete,
Sidewalks or Other material of similar lasting character, five years.
(13) For connecting dwellings or other buildings with pubhc sewers.
Connection when a portion of the cost is to be assessed on the abutting pro-
wl th sewers __.. ^
perty owners, five years.
Abatement (14) For the abatement of nuisances in order to conserve
o nmsances ^j^^ pubUc health, five years.
(15) For extreme emergency appropriations involving the
Emergency health or safety of the people or their property, five
appropna- , •' r- r- r c J7
tions years.'
' Acts igi3, chap. 719, sec. s, as amended by Acts igi4, chap. 317.
COUNTY, MUNICIPAL, AND DISTRICT BONDS I4S
Debts may be authorized as above only by a two-thirds vote of all
the members of a city council or other governing body taken by
yeas and nays and subject to the approval of the xwo-thirds
mayor, if such approval is required by the charter of vote is
the city; and in the cases of towns only by a vote '""^^^^^'^
of two thirds of the voters present and voting.^
Cities and towns may incur debt outside the limit of indebtedness
prescribed above for the following purposes and pay- Debt outside
able within the periods stated below: — *'■"''
(i) For temporary loans in anticipation of revenue, or in antici-
pation of the issue of bonds or notes, or in connection with
altering grade crossings, or in connection with Temporary
highway construction in anticipation of reim- '°*"^
bursement by the Commonwealth, one year.
(2) For establishing or purchasing a system for supplying the
inhabitants of a city or town with water, or for the pur-
chase of land for the protection of a water sys- „, , ,
, , . ^ . , , . "^ Water works
tem, or for acquirmg water rights, thirty years.
(3) For the extension of water mains and for water equip-
water departmental equipment, five years. ™^'^'
(4) For establishing, purchasing, extending or enlarging a gas or
electric lighting plant within the limits of a city or town,
twenty years; but the indebtedness so in- Electric
curred shall be limited to an amount not ex- ''sht plants
ceeding in a town 5% and in a city 23% of the last pre-
ceding assessed valuation of such town or city.
(s) For acquiring land for the purposes of a pubUc playground,
as specified in section 19 of chapter 28 of the Revised Laws
and amendments thereof, thirty years; but the „. ,
indebtedness so incurred shall be limited to
an amount not exceeding one half of 1% of the last preced-
ing assessed valuation of the city or town.^
, All other debts hereafter incurred by a city or town shall be reck-
oned in determining its limit of indebtedness, and debts authorized
under the provisions just stated, except for tempo- y^j^g ^^^^g,
rary loans, must be authorized by the same votes as sary outside
in the case of debts within the debt limit. Temporary ^ ^ '""*
loans, unless in anticipation of the proceeds of bonds or notes
(which require no vote at all) , require a majority Certificates
vote.' P'=«P* '"
, ^ temporary
. Cities and towns may sell bonds, notes, or certifi- loans must be
cates of indebtedness as authorized above at not ^°^^ ^' ^^
* Ads igi3, chap. 719, sec. 5.
' Acts igi3, chap. 719, sec. 6. See also sections 2, 3, 4, and 9. • Ibid.
146 AMERICAN AND FOREIGN INVESTMENT BONDS
less than par at public or private sale. Temporary loans, as de-
scribed above, to run not over one year may be sold at a dis-
count.'-
7. No further sinking funds for the payment of debts created by
Payment of cities and towns shall be established, and all loans, except
method is^"^' temporary loans to run not over one year, shall be payable
compulsory in annual installments sufficient to extinguish at maturity
the debt created.''
8. The city of Boston shall not assess for ordinary municipal purposes
over $10.55 on every $1000 of taxable property, according to the
Tax limits for average assessed valuation for the preceding three years.'
municipal Other cities in Massachusetts may, after a pubUc hearing,
purposes estabUsh by ordinance the maximum rate of taxes to be
raised for ordinary municipal pinposes, that is, for purposes exclu-
sive of the state tax and other amounts assessed upon the city by
the State, the county tax and sums required by law to be raised on
account of the city debt. Such maximum rate can be thereafter
changed only by a two-thirds vote of the governing body, after a
pubUc hearing.*
9. During the year 1914 every city and town which has at the time of
this act (1913) outstanding notes payable on demand, or which has
Payment of expended for the general expenses of the city or town
and restoration ^^^^ funds which have not been restored, shall provide
of trust funds for the payment of such notes and for the restoration of
such trust funds in the tax levy for the year 1914 where such provi-
sion is reasonably practicable. When not practicable, debt may be
incurred, outside the limit of indebtedness fixed by law, to the
amount necessary to pay the demand notes or restore the trust
funds, and serial bonds or notes may be issued payable at periods
not later than fifteen years from their respective dates of issue.*
A brief discussion of the propriety and wisdom of the above laws
„ . , and a comparison with the laws of other States may
Comparison of . ^ ^ •'
Massachusetts be of interest. The variations are almost numberless,
those of but certain general resemblances and differences may
other states be pointed OUt.
The first thing to fix in mind is the position of the legislature.
As a rule, its action is limited by constitutional restrictions. In
some States, however, such as New Hampshire,^ Massachu-
' Acts 1913, chap. 719, sees. 8 and 10. ' Tbid., sees. 13 and 14.
' Ibid., sec. 18. ' Ihid., sec. 19. ' Ibid., chap. 634.
' Abbott, Lav/s of Public Securities, sec. 495, p. 992.
COUNTY, MUNICIPAL, AND DISTRICT BONDS I47
setts,^ and Kansas,^ the limitation 'of the creation of debts by
counties, municipalities, and other political subdi- Authority and
visions is left to the state legislature without sub- LegiSature in
stantial constitutional restrictions. Sometimes the certain states
legislature in municipal charters lays down certain limits for the
creation of debt;^ sometimes it passes more or less general leg-
islation; and sometimes it authorizes by special acts specific
loans.
The limitation of the debt of cities in Massachusetts to 2^% and
of the debt of towns to 3% of the average assessed valuation for the
threeprecedingyears, except for temporary loans and .
except for the acquisition of property which should indebtedness in
.ir .. p 11* 1 1 1 Other States
be seu-supportmg or for public playgrounds, may be
said to be very conservative. This compares with a gross debt
limit, with certain exceptions, of 10% in New York State; * a gross
debt limit of 2% of the value of taxable property, except obliga-
tions incurred for public protection or defense and except gravel
road bonds, in Indiana;^ a limit for municipalities in Wisconsin'
of 5% of the value of taxable property; a limit, with certain excep-
tions, for cities and towns in Virginia ' of 18% of the assessed value
of real estate unless further issue is authorized by a majority vote
of the people ; and in Louisiana,* a limit for munidpahties, parishes,
and districts, with certain exceptions, of 10% of the assessed value
of the property.
A practice has crept into the constitutional provisions or laws of
some of the States making special exceptions in favor of certain
' Abbott, Laws of Public Securities, sec. 487, p. 978.
' Constitution of Kansas, art. xn, sec. $•
• State and City Section of the Commercial and Financial Chronicle, May 30,
X914, pp. 32 and s8.
* Constitution of New York, art. vm, sec. 10, as amended November, 1909, in effect
January i, 1910. Birdseye, Consolidated Laws of New York, vol. 7, p. 22.
' Constitution of Indiana, art. xm. Bums's Annotated Indiana Statutes (Revision
of 1914), vol. I, p. 124.
' Constitution of Wisconsin, art. xi, sec. 3. See Wisconsin Statutes (1898), vol. 1,
p. 122.
' Constitution of Virginia, art. Vin, sec. 127. Pollard, Code of Virginia (1904),
p. ccxlii.
' Constitution of Louisiana (1913), art. 281, as amended November 3, 1914. See
Acts of Louisiana (1914), no. 192, for amendment. Drainage districts, under the
above article, are given powers relative to incurring indebtedness up to fifty cents
per acre, to be secured by special taxes of like amount.
148 AMERICAN AND FOREIGN INVESTMENT BONDS
communities, so as to allow them to issue bonds beyond the
amovmt authorized for other commimities in the same
£xceptions m
favor of certain State. Examples of a reasonable use of this practice
commum les ^^^ -^^^ York ^ and Philadelphia * for expensive per-
manent improvements, such as subways and docks. Examples of
what seem to us illogical and possibly dangerous exceptions are
those found in the laws of South Carolina ' and Alabama.* In
South Carolina, especially, the habit has grown up of excepting
municipahties from the debt limit for almost any purpose.
In this connection it is to be noted that Massachusetts in its
recently enacted legislation, while carefully limiting the creation of
Limiting debt debt, has removcd the tax limit for mimidpalities, ex-
tex w fa°^ cept in Boston, in all municipalities in the State. This
Massachusetts geems to US wise. Removing the tax limit and care-
fully limiting the creation of debt certainly is more conservative
than limiting the tax rate and allowing more or less liberal borrow-
ing. A rise in taxes is noticed sooner and felt more directly by citi-
zens than is an increase in the debt. Tjdng any community down
too tight in both respects may hamper its reasonable development
and in the long run make its bonds less safe.^
AH the purposes for which mimicipahties in Massachusetts may
issue bonds, it will be noted, are of a strictly public character and
not for the special benefit of any private individual
Purposes of '^ -^ ^
issue should or corporation. Throughout the Umted States the
be of 3. strictlv
pubUc most common purposes for which county, municipal,
c aracter ^^^ district bonds may be issued are as follows:
Roads, bridges, and county buildings, such as court-houses and
jails; parks and playgrounds, sewers, waterworks, and electric
' Constitution of New York, art. vin, sec. 10, as amended 1909. Birdseye, Con-
solidated Laws of New York, vol. 7; cumulative Supplement (1910-13), vol. 1, p.
22.
' Constitution of Pennsylvania, art. ix, sec. 8, as amended 1911. Purdon's Digest
(13th ed.), supplement of 1912, p. 2.
' Constitution of South Carolina (189s), art. x, sec. 6, as amended 1911. See also
ibid., art. vin, sec. 7. See Code of Laws of South Carolina (1912), vol. n, pp. 632,
642, 660.
* Constitution of Alabama (1901), art. xn, sec. 226. Code of Alabama (1907;
Criminal), vol. 3, p. 173.
' For difficulties likely to arise in bonds payable out of taxes limited to a certain
amoimt, see United States v. County of Clark, 96 U.S. 211, and State ex rel. Hudson
V. Trammel, 106 Mo. 510; 17 S.W. so*.
COUNTY, MUNICIPAL, AND DISTRICT BONDS 149
lighting plants ^ and municipal buildings, such as school-buildings,
city or town halls, and fire stations.
As examples of authority given mimicipalities outside of Massa-
chusetts to issue bonds for improper or unwise purposes, mention
may be made of the following: Permission for towns Examples of
in Vermont ^ to borrow for the benefit of railroads to fJiue°bonds°
an amount not exceeding practically 8% of the as- oTuSmse^^'
sessed valuation; permission for counties and munici- purposes
palities in Minnesota ' to create debts in aid of railroads to an
amoimt not exceeding 5% of the taxable property of the munici-
pality; permission for municipalities in Nebraska * to make dona-
tions to a railroad or for other works of internal improvement to an
amoimt not exceeding 10% of the aggregate assessed valuation of
the county and subdivisions, provided the proposition shall have
been approved by the voters, with permission for an additional
amount of 5% by a two-thirds vote; and permission for certain
townships in South Carolina ® to issue railroad-aid bonds to an
amount not exceeding 8% of the assessed valuation.
In a large mmiber of the States, issuing bonds in aid of railroads
or for private enterprises, purchasing the stock of private corpora-
tions, or loaning the credit of the coimty or mmiicipal- ^
' ° "^ , , ^ In many States
ity to such corporations specifically is forbidden.^ loaning credit
This prohibition is the result of the experience which munidpaKties
many counties and some municipalities have had, in '^ f°rbiddeu
> Two interesting provisions among the laws of many States authorizing munici-
palities to borrow for the purchase of public utilities are : those in the laws of Michigan
authorizing villages to issue mortgage bonds to acquire public utilities without liability
on the part of the village; and those in the laws of Mississippi providing that bonds
issued for waterworks, gas or electric lighting plants may be secured by pledge of
the revenue of such plants. (Public Acts of Michigan [1909], chap. 278, sec. 26. See
Howell's Michigan Statutes [2d ed.], vol. 3, title xvi, chap. 98, sec. 6215. Laws of
Mississippi [1914], chap. 147, sec. 6.)
' Public Statutes of Vermont (1906), sec. 3558.
» General Statutes of Minnesota (1913), sees. 1928 and 1951. See also Constitution
of Minnesota, ait. rx, sec. 15.
* Constitution of Nebraska, art. xn, sec. 2. See also Revised Statutes of Nebraska
(1913), sec. 405.
' Constitution of South Carolina, art. x, sec. 6. Code of Laws of South Carolina
(1912), vol. 2, p. 642 . See also Acts of South Carolina (1911), nos. 155, 156, iS9, 162-
' Constitution of New Hampshire, part 2, art. v. Public Statutes of New Hampshire
(1901), p. 33. Connecticut: Amendments to the Constitution, art. xxv. Constitution of
New York, art. vm, sec. 10. Birdseye, Consolidated Laws of New York, p. 150.
Constitution of Illinois, art. xiv, separate section; Emsed Statutes of Illinois (1912},
p. Izzv.
ISO AMERICAN AND FOREIGN INVESTMENT BONDS
issuing bonds in aid of private enterprises, partiailarly railroads,
of finding later that the communities did not get the benefits which
they expected and of being obliged or being willing to default on
the bonds. The experience of counties and mimicipalities in this
respect has been similar to the experience of many of our States-
Certain States permit municipalities to issue refunding bonds —
a practice which should not, except under special circumstances.
Refunding ^^ permitted. Among such States may be mentioned
bonds Vermont, 1 Rhode Island," Virginia,' and Alabama.*
In the Massachusetts laws, the length of time which bonds may
run is based, as far as practicable, on the permanence of the work
^ ,, , for which the money is spent. For instance, bonds is-
setts time to sucd f or the purchase of land for parks or playgrounds
with pCTma-° ^ give the city a permanent asset. Bonds issued even for
nence of work school-buildings alonc give the city property with a
life probably of at least twenty years; whereas bonds issued for
sidewalks may give the municipality property which will have to
be replaced or rebuilt within a short time. The limitation to ten
years of bonds issued for cemetery purposes is based probably on
the minimum estimate of the length of time the land will be avail-
able for cemetery purposes.
In the constitutions or statutes of many of the States, an arbi-
in some States '^ary limit is placed on coimties, cities, and other po-
the length of Utical subdivisious as to the length of time which their
tmie bonds may , °
run is fixed bonds may run. For mstance, bonds m Colorado*
to thTpurpose must nm not less than ten years and not more than
of issue fifteen years ; bonds in New Hampshire ^ and inlllinois ^
' Public Statutes of Vermont (igo6), chap. 157, sees. 3567, 3572.
' General Laws of Rhode Island (1909), title vm, chap. 46, sec. 21. (Towns only.)
• Acts igoS, p. $3$. Pollard's Virginia Code, Annotated, vol. 3 (Supplement, 1910),
sec. 1038 /, p. 133. See also Acts 1914, p. 256. Pollard's Code Biennial (Virginia,
1914), sec. 834 b, p. 142.
• Constitution of Alabama (igoi), sec. 224. See also Acts of Alabama (1907), p. 790,
sec. 195. Political Code of Alabama (1907), art. xxvni, sec. 1436.
' Constitution of Colorado, art. xi, sec. 8. Mills's Annotated Statutes of Colorado,
p. c 207. See also ibid., chap. 161, sec. 7226, sub-section 6, p. 3028.
• Municipal Bonding Act, Laws of New Hampshire (1895), chap. 43, sec. 2.
Public Statutes of New Hampshire (1901), p. 491.
' Constitution of Illinois, art. ix, sec. 12. Revised Statutes of Illinois (1912), p.
tdz. See also Revised Statutes of Illinois (1912), sec. 700, p. 455; chap. 34, sec. 128,
p. 657.
COUNTY, MUNICIPAL, AND DISTRICT BONDS 151
must be paid within twenty years; in Oklahoma, ^ within twenty-
five years; in Pennsylvania,^ within thirty years; in Texas,' within
forty years, and in California,* with certain exceptions, within
forty years.
In many States it is necessary to have all or practically all bond
issues of local communities, beyond a certain amount, authorized
by a vote of the people ; for instance, in Pennsylvania,^ j^ ^^^
a majority vote is necessary; in South Carolina,* a States a vote
. . , , , . , . , .of the people is
majonty of voters who have paid taxes for the previ- necessary to
ous year; in Utah,^ a majority vote of the property ^'i"'""^^ ''°°<*^
taxpayers; in Vermont,* Kentucky,' Missouri,^" North Dakota,^^
and certain other States, a two-thirds vote of the people; and in
Oklahoma ^^ and Washington,^' a three-fifths vote of the people.
Provisions of many other States along these lines could be given.
We have discussed above the Massachusetts laws in regard to
the creation of local debt, and have compared them with the laws
of some of the other States. The creation of debt is Methods of
one thing and the payment of it is another. The paying debt
Massachusetts laws ^* compel payment by serial method. The com-
monest method still, however, in other States is payment through
the estabhshment of sinking funds, created out of annual taxes and
calculated to be suflScient with accumulations to pay the principal
of the debt at maturity. Payment by serial method is simpler,
more scientific, and probably more economical.
' Constitution of Oklahoma, art. x, sec. 26.
* Constitution of Pennsylvania, art. DC, sec. 10. Purdon's Digest (13th ed.), vol. i,
p. igg. See Act of April 20, 1874, sec. i, Laws of Pennsylvania, p. 65. Purdon's
Digest (13th ed.), vol. 3, p. 2721.
» Revised Civil Statutes of Texas (1911), title xvm, art. 618.
* Constitution of California, art. xi, sec. 18. Henning's General Laws of California
(1914), p. 79; ibid., vol. 5, chap. 352, art. 3051, sec. 5.
' Constitution of Pennsylvania, art. K, sec. 8. Pvirdon's Digest (13th ed.), vol. r,
p. 197.
* Constitution of South Carolina, art. n, sec. 13. See also art. 8, sees. 5 and 7.
' Constitution of Utah, art. xiv, sec. 3.
' Public Statutes of Vermont (1906), diap. 157, sec. 3556.
' Constitution of Kentucky, sec. 157.
'° Constitution of Missouri, art. x, sees. 12 and 12 A. Revised Statutes of Missouri,
(1909), chap. 84, art. 2, sec. 8668.
•' Constitution of North Dakota, art. xn, sec. 183. Compiled Laws of North Dakota
(1913), p. ciii.
'* Constitution of Oklahoma, art. x, sec. 26.
" Constitution of Washington, art. vrn, sec. 6. " Acts igi3, chap. 719, sec. 14.
152 AMERICAN AND FOREIGN INVESTMENT BONDS
On the whole, the Massachusetts laws, in our opinion, establish
a system of creating and paying debt that seems financially somid
Local debt ^°^ politically expedient.^ They cover in a systematic
laws in way all the proper purposes for creating debt; and
on the whole, ' they provide a safety-valve for the public demand for
^°° improvements through the removal of the state limit
on the local tax.
In general, it may be said that constitutional or statutory provi-
sions ia regard to the creation of local debt which are too strict or
General laws *°° narrow are imdesirable. They are likely to lead
j°^sard to to a long Ust of exceptions and special acts * which, in
should not the end, will take much of the effectiveness out of the
limitation of debt. The provisions of many States in
regard to debt creation by municipalities seem extremely conserva-
tive when you begin to read and extremely lax before you finish.
Taken by and large throughout the coxmtry, the state limita-
tions on the creation of local debts are much more liberal than the
Laws govern- provisions governing the creation of state debt. This
more°uhe?d''^ is, in our opinion, desirable. The credit of the State
goveridng* should be reserved largely for emergencies. Further-
state debt more, the citizens of a dty or town are better able to
judge of the desirability of any given loan by the municipality than
they are of a state loan. In the case of a municipal loan, the citizens
get the direct benefit and they carry the immediate burden.
Other factors Perhaps even more important than the constitu-
tte^safetyo? tional and statutory provisions regulating the crea-
""^.'5;. tion and payment of local debt are the following con-
municipal and _ *^ -' °
district bonds siderations:
(i) The amoimt and character of the population.
(2) The record of good or bad faith.
(3) The location, prosperity and probable future growth of the
community.
The amount of the population of a county or dty is an important
consideration. There are Just fifty cities, according to the census
' In the matter of public credit, all considerations having a bearing on the general
status and well-being of the community are relevant.
^ Some people have criticized even the new Massachusetts laws in this respect.
The right to go to the legislature for special acts is not, of course, taken away,
although the inducement to do so is less than under the old laws.
COUNTY, MUNICIPAL, AND DISTRICT BONDS 1 53
of 1910, with a population of 100,000 or over. New York City is
the largest and Albany the smallest of these fifty The amount
cities. The ten largest cities of the United States tfon''i7°^"'*'
with their population are: 1 important
New York, New York 4,766,883
Chicago, Illinois 2,185,283
Philadelphia, Pennsylvania 1,549,008
St. Louis, Missouri 687,029
Boston, Massachusetts 686,092
Cleveland, Ohio 560,663
Baltimore, Maryland 558,485
Pittsburg, Pennsylvania 533)905
Detroit, Michigan 465,776
Buffalo, New York 423,715
The direct obligations of the above cities, payable out of taxes
levied on all the property within those cities, may be considered, in
a general way, the leading municipal securities in the United States.
If we should take a limit of 50,000 people or over, we should find a
long Hst of cities with high credit.
More important even than the size of the population in its effect
on the real safety of municipal bonds is the character of the popu-
lation. In the last resort, all debts of any kind depend The character
on the good faith of some person or persons to do as °l^^^ P°p""
they have agreed and to honor their obligations. The important
character of the people of the New England States, from the point
of view of paying their debts, is perhaps better than that of any
other section of the country. The people of New York State like-
wise have been careful about the payment, if not about the crea-
tion, of debt.
This leads us to speak of the record of county, municipal, and
district bonds and to discuss briefly certain typical defaults. In
proportion to the amount of bonds put out, the record The record of
of municipal bonds is better than that of state bonds. boTds'htl
Perhaps this is true largely because the history of th|nthat"f
state debts is longer and covers much more of the state bonds
early development period in the United States, when the popula-
tion was shifting and the relation of the people to their various
> Thirteenth Census of the United States (1910), vol. i, Population, pp. 78-79.
154 AMERICAN AND FOREIGN INVESTMENT BONDS
government units and to private enterprise was in a more or less
chaotic condition. Perhaps, also, the completeness of the legal
remedy in the case of mxmicipal bonds has had a tendency to re-
strict the amount of defaults. At the same time, the amount of
defaults in payment of interest or principal of coimty and munici-
pal bonds, if we include all cases of bonds illegally issued, is con-
siderable. A writer in the "North American Review" many years
ago estimated the amount of defaulted county, city, township, and
school-district bonds as over $300,000,000.1 Included in this total
was a large amount of defaulted bonds in such States as lUinois,
Missouri, Kansas, Nebraska, and the Dakotas, as well as in the
Causes of South.^ As in the case of state defaults, illegality
<»"°.'y' , usually has been the excuse rather than the reason.
municipal ^
and district The prmapal causes of default m the bonds of
coimties, municipaUties, and districts have been: —
(i) A furor for improvements similar to that which prevailed at
one time in many of our States and which led to financial
difl&culties at one time or another of such cities as Pitts-
burg, Pennsylvania,' Elizabeth, New Jersey,* and Superior,
Wisconsin.^
(2) Issue of railroad-aid bonds or bonds for other doubtful or
illegal purposes, as in the cases of Macon County, Missouri,'
St. Clair County, Missouri,^ Green County, Kentucky,*
Taylor Coimty, Kentucky,' and Otoe County (Nebraska
City Precinct), Nebraska. ^^
(3) Issue of bonds by small, struggling or unstable communities
where the property and taxing power proved insufficient to
take care of the bonds, as in the cases of Syracuse, Kansas,"
Olympia, Wasliington,!^ Middlesboro, Kentucky, ^^ and
Mobile, Alabama."
' John F. Hume in the North American Review, August, 1884, pp. 129 and 131.
' Ibid., p. 131, and C. M. Harger in Moody's Magazine, February, 1906, p. 358.
' Commercial and Financial Chronicle, vol. 24, p. 591. * Ihid., vol. 28, p. 146-
^ Ibid., vol. 79, p. 2107. The defaulted bonds were held by the United States
Circuit Court of Appeals to be special assessment bonds.
' Ibid., vol. 92, p. 1191. ' Ibid., vol. 89, p. 1293. ' Ibid., vol. 96, p. 1507.
' Ibid., vol. 95, p. 1760. '" Ibid., vol. 72, p. 302.
'' Information given by bankers.
'' Information given by bankers.
" Ibid. See also Commercial and Financial Chronicle, vol. 84, p. 404.
" Commercial and Financial Chronicle, vol. 25, p. 382.
COUNTY, MUNICIPAL, AND DISTRICT BONDS !$$
(4) Special misfortunes, such as yellow fever epidemics in Mem-
phis, Tennessee,' and Savannah, Georgia," and the disas-
trous floods at Galveston, Texas.'
(5) Issue of bonds by municipal irrigation districts, where the
inherent risk of the enterprise is considerable, such as Denver-
St. Vrain Municipal Irrigation District, Colorado,* Denver-
Greeley Irrigation District, Colorado,* and San Arroya Irri-
gation District, Colorado.*
The above examples have been chosen not because they are in,
every case the worst, but because the information is available.''
There have been also a few cases of plain bad faith, of which
mention may be made of St. Joseph, Missouri,* which voted to
compromise and refund a city bonded debt at sixty c^ses of
cents on the dollar with reduced interest when there ^^ ^^^^^
was no necessity for any default, and Fort Worth, Texas,* which
refunded a portion of its old 6% bonds with new 4% bonds without
any necessity for such action and without any adequate reason.
A recent attempt at bad faith, which proved little more than
amusing, was the effort of the Mayor of Atchison, Kansas, to re-
fimd in July, 1913, at a time when municipal bonds Attempted
were selling to yield from 4|% to S% net income, old b^A^t^c'hhon.
4% bonds with new 4% bonds at par and his refusal K*"sas
to pay off the old bonds in cash. The result of this attempt was the
ruling by the Kansas Supreme Court that it had jurisdiction to
require levy of a tax to pay full principal of the bonds and f orbid--
ding any tax levy unless provision was made for them.^"
In the matter of the settlement of the claims of bondholders on
' Commercial and Financial Chronicle, vol. 31, p. 328.
' Investor's Supplement, Commercial and Financial Chronicle, January 26, 1878,
p. xiii.
' Commercial and Financial Chronicle, vol. 71, p. 564.
* Ibid., vol. 92, pp. 476 and 972. ' Ibid.
' State and City Section, Commercial and Financial Chronicle, May 30, 1914,
p. I4S-
' See Appendix, "County and Munidpal Defaults,'' pp. 297-303.
' Commercial and Financial Chronicle, vol. 23, pp. 13s and 175; ibid., vol. 25,
p. 408; ibid., vol. 28, p. 477.
• Ibid., vol. 69, p. 711, and information received from bankers.
" Levison v. Finney, no. 18,934, Supreme Court of Kansas. This case never was
reported for the reason that it never came to a final hearing on the matter of levying
a tax. (Letter from Clerk of Court, November 7, 19 14. See Appendix, p. 304.}
156 AMERICAN AND FOREIGN INVESTMENT BONDS
defaulted county, municipal, and district bonds, the practice has
varied all the way from full settlement of interest and
made with principal, as in the case of Pittsburg, Pennsylvania,*
on o ers ^^ ^-^q so-called Penn Avenue bonds, to a failure to
pay anything at all, as in the cases of the railroad-aid bonds issued
by Green Coimty, Kentucky,^ and St. Clair Coimty, Missouri.'
Elizabeth, New Jersey,^ Memphis, Teimessee,* and New Orleans,
Louisiana,* at one time or another compromised all or a part of
their debt on the basis of fifty cents on the dollar. Mobile, Ala-
bama,' issued $510 in new 6% bonds for every $1000 of old 8%
bonds. Macon County, Missouri,* settled an aggregate claim of
$2,200,000 with $750,000. Scaling of the principal to a greater or
less degree has taken place in many other cases.'
On the whole, reduction in interest rather than scaling of the
principal has been the rule. Where the amount of bonds has been
Bondholders Small and where the prospect has been nothing worse
often have than a Scaling ia interest, bondholders often have
accepted re- ° ,. , ,
duction in f ound it more advantageous to accept a slight reduc-
than fight tion in interest rather than fight the question through
through courts ^^^ courts with the possibility in some cases of not
being able to collect the amoimt of the probable judgment.
The attitude of the people toward repudiation of county or
municipal obligations has been, perhaps, less radical than the at-
, . , , titude of the people in the cases of certain of our
Attitude of . '^ -^
the people States. With the exception of some of our counties,
promise or the piocceds of bouds issued have not been wasted to
repudiation ^j^^ same extent as were the proceeds of some of our
state bonds. Illegality of issue as an excuse for compromise or
repudiation has been used almost as frequently; but the knowledge
of the existence of a legal remedy in the case of counties, munici-
palities, and districts, — suit to compel levy of taxes to pay interest
' Commercial and Financial Chronicle, vol. 28, p. 302.
^ Ibid., vol. 77, p. 48; vol. 84, p. 949. These bonds have been practically invali-
dated by the United States Supreme Court.
' Ibid., vol. 89, p. 1293. State and City Section, Commercial and Financial
Chronicle, May 30, 1914, p. 124.
■* Commercial and Financial Chronicle, vol. 47, p. 50. ' Ihid., vol. 37, p. 202.
' Ihid., vol. 31, p. 606-607. ' Ibid., vol. 21, p. 302. ' Ibid., vol. 92, p. 1191.
' For leading steps in the history of certain county and municipal defaults and
settlements, see Appendix, pp. 297-300.
COUNTY, MUNICIPAL, AND DISTRICT BONDS 1 57
and principal of bonds, — and of the disposition of the courts to
interpret legality of issue strongly in favor of maintaining good
faith, have caused the people and their representatives to take a
firmer attitude toward the payment of their debts. As a rule, the
extent of the effort toward compromise or repudiation has de-
pended on the character of the population.
Aside from the defaults and compromises on mimicipal bonds,
there has been in local finances, especially of recent years, a con-
siderable amount of mismanagement which has ,,.
, , , , Mismanage-
threatened to lead to financial difficulties. This situa- ment of local
tion has been met sometimes by passing careful gen-
eral laws governing finances of municipaUties, as in Massachusetts,
and sometimes by establishing a commission form of government,'
which has been done in the cases of Lawrence, Massachusetts," Om-
aha, Nebraska,' Denver, Colorado,* and New Orleans, Louisiana.^
In addition to the size and character of the population and the
record of good or bad faith, the factors of location, present pros-
perity, and probable future growth are important.
These are questions which can be looked up fairly ent prospenty^
easily in the cases of most of our cities and towns. ^^J^^J^
In addition to the national and state censuses, the cominunities
' are important
growth of cities often may be mdicated by changes
in postal receipts, bank clearings, school attendance, and other
similar indices.
In connection with municipal bonds, there are two factors which
should always be borne in mind: (i) That the obligations in order
to be legally binding must be legally issued; and (2) Legality of
that the certificates must be genuine * and in proper cenffication as
form. The legality of the issue of municipal bonds is '° genuineness
taken care of usually by bankers obtaining the opinion of first-class
1 According to the Boston News Bureau, June 12, 1914, 6g cities out of 195 having
an estimated population of 30,000 or over have adopted the commission form of
government. Dayton, Ohio, is given as the only city of 30,000 people or over
having the "city manager plan."
' State and City Section, Commercial and Financial Chronicle, May 30, 1914, p. 24.
• Ibid., p. 130.
• Commercial and Financial Chronicle, vol. 96, p. 580; vol. 97, p. 1322.
• Ibid., vol. 9S, p. 634.
' See the case of forgery of town notes in Framingham, Massachusetts, Franklin
Savings Bank v. Inhabitants of Framingham, 212 Mass. 92.
158 AMERICAN AND FOREIGN INVESTMENT BONDS
lawyers. The genuineness of the certificates often is arranged by
certification by some bank or trust company or, as in the case of
town notes in Massachusetts ^ and bonds in North Dakota," Ne-
braska,' and Texas,* by certification by some state bureau or by
state and county ofl&cials.*
During the past twenty-five years and especially during the past
ten or a dozen years, there has been a large increase in the amoimt
Increase in of county, miuucipal, and other local debt. The
dp"af ^I'Zct accompanying table shows aggregate net debt, or
local debt indebtedness less sinking-fund assets, and net debt
per capita of coimties, cities, towns, villages, townships, school
districts, and other subdivisions in the United States for 1890,
1902, and 1913, together with percentages of increase.'
Date
Debt less sinking-
fund assets
Per cent increase
i8go-igo2 and
i902-igi3
Per-capita debt
less sinking-
fund assets
Per cent increase
iSgo-igoz and
igo2-igi3
1890
1902
1913
$925,989,603
1,630,069,610
3,475,954,353
76.0
113- 2
5i4-79
20.74
35-81
40.2
72.6
While practically all these increases represent the creation of
debt for purposes which, broadly speaking, are entirely proper,^
and while due allowance must be made for the great growth of the
country during this period, the amoimt of increase certainly is
^ Acts igio, p. 616, as amended by Acts igiz, chaps. 45 and 49. See also Acts igis,
chaps. 84 and 285.
' Constitution of North Dakota, art. xn, sec. 187.
' Constitution of Nebraska, art. xrr, sec. 2.
* Acts iSgs, p. 184; Acts igoi, p. 16. Resised Civil Statutes of Texas (1911), title
xvni, jirts. 619-625.
^ lii Georgia, the validity of proposed bond issues is determined in advance by
the Superior Court: and when judgment is given in the affirmative, the bonds never
thereafter can be questioned. {Acts i5p7, p. 82; Code of the State of Georgia [1911],
sees. 445-451.)
^ Department of Commerce, Bureau of the Census, Wealth, Debt, and Taxation
(1913), vol. I, pp. 234-35.
' For value of public properties and assets of funds, other than sinking funds, of
counties in 1913, see Department of Commerce, Bureau of the Census, County Reve-
nues, Expenditures, and Public Properties, igij (Washington, 1915), p. 29S; and for
figures in regard to incorporated places having a population of 2500 and over, see
Department of Commerce, Bureau of the Census, Municipal Revenues, Expenditures,
and Public Properties, igij (Washington, 1915), p. 336.
COUNTY, MUNICIPAL, AND DISTRICT BONDS 159
startling. During the past twelve or fifteen years, large sums have
been expended for parks, playgrounds, and other permanent im-
provements. It is hard to escape from the conclusion that this
great increase in local debt is part of the general extravagance
which characterized the period.'
Perhaps we might say, with the likelihood of being right, that the
increase in municipal debt in the next few, years would be propor-
tionately less than in the past few if it were not for increasing
the more or less general movement under way to-day lo acquire pub-
toward the acquisition by municipalities of street rail- ^'^ utilities
ways and of gas and electric lighting plants. We find that even in
Massachusetts municipal ownership of electric lighting plants has
spread to a considerable extent.'' We find in addition mimicipal
lighting plants in Vermont, Connecticut, New York, Pennsyl-
vania, Ohio, Michigan, Kansas, Oregon, North Carolina, and
many other States.' ^. .^ .
, Distnbution
The total local debt in 1913, as given by the Umted of local
States Census, is made up as follows: * ^ '^^^
Amount
Per cent of total
Counties
$371,528,268
2,985,555,484
118,870,601
10.7
Cities, towns, villages, etc
85-9
Total
S3y*75,954,3S3
100.
This shows the bulk of our local debt to be debts of cities, towns,
and villages.*
' For short discussion of increase in local debts of Great Britain, France, and Ger-
many, see Hirst, Credit of Nations (Washington, 1910), pp. 39, 94, and 72. For an
early discussion of municipal debt in the United States, see Atlantic Monthly, vol.
xxxvm, pp. 661-73 (Charles Hale, "Mimicipal Indebtedness").
' See Twenty^inth Annual Report, Board of Gas and Electric Light Commissioners
(Boston, 19 14).
' State and City Supplement, Commercial and Financial Chronicle, May 30, 1914,
passim. The debt of local communities in Great Britain for public utilities is large.
See Hirst, Credit of Nations (Washington, 1910), p. 45.
* Wealth, Debt, and Taxation, igij, vol. i, p. 235.
' The proportion which local debt bears to national and to state debt inay be
seen from the following figures for 1913: Nation, $1,028,564,055; States, $345,942,-
305; minor divisions, $3,475,954,353; total, $4,850,460,713. {Wealth, Debt, and Taxa-
, turn, ipij, vol. I, p. 229.)
l6o AMERICAN AND FOREIGN INVESTMENT BONDS
Owing somewhat to the large increase in the supply of municipal
bonds, but still more to the decline ia. the prices of all long-time,
DecUne in high-grade bonds, municipal bonds have been selling
apaJ^onds""' during the past two or three years at or near the low-
1902-12 egt prices for over twenty years. The following table
shows prices on an income basis of the bonds of some of our leading
cities in January, 1902, and January, 191 2: —
Cities
Boston, Massachusetts . . . .
New York, New York ....
Philadelphia, Pennsylvania
Chicago, Illinois
Milwavikee, Wisconsin. . . .
St. Paul, Minnesota
Net yield
igo2
igiz
3- 10%
3 -00%
3 -20%
3-25%
3 -20%
3- 90%
4.10%
3 90%
4.00%
4- 00%
4.00%
If we capitalize a thirty-year 4% bond on a 3% basis, we get a
price of 119.69 and interest; if we capitalize the same issue on a 4%
basis, we get, of course, a price of 100 and interest. If we do the
same thing with a twenty-year 4% bond, we get a price of 114.96
and interest for a 3% basis and a price of 100 and interest for a 4%
basis. These figures represent very fairly, we think, the extent of
the decline in the prices of the leading city bonds between 1902 and
1912.1
The effect of the European war on the prices of municipal bonds
has been considerable. The following prices (see table on page
161), obtained by reducing basis prices given in dealers'
lists to definite prices for twenty-year 4% bonds, may
be of interest. ^
The prices given in the table show an average decline for the
year of 2.43 points.
* Prices taken from circulars of leading bond dealers for January, 1902, and Jan-
uary, 1912.
* The prices of New York City bonds are reduced from the New York Stock Ex-
change prices as given in the Commercial and Financial Chronicle, vol. 99, p. 32, and
vol. loi, p. 34.
War prices
COUNTY, MUNICIPAL, AND DISTRICT BONDS l6l
Boston, Massachusetts, registered
Providence, Rhode Island
New York, New York
Cleveland, Ohio
Minneapolis, Minnesota
Memphis, Tennessee
Portland, Oregon
July, 1(114
(And interest)
loo.oo
100.69
100.00
g8.64
99.18
94.72
97-31
July, igi5
(And interest)
99- 32
99-3*
96.2s
96.6s
9S04
91.59*
9S-3S
• Lowest oSering.
In closing this chapter, we would give as our opinion that county,
municipal, and district bonds are among the safest mediums of
investment in the world. As far as the record for past performance
goes, municipal bonds are entitled to greater con- on the whole,
sideration than any of our state bonds except the bondfar^ ex-
very best. To-day the laws governing the creation of ^eedingiy safe
debt by municipal or quasi-municipal corporations are conserva-
tive enough to make investment in the bonds of communities even
of moderate size exceedingly safe.
CHAPTER V
STEAM-RAILROAD BONDS
Railroad bonds may be defined as the obligations of railroad
Definition of Companies operating their properties usually with
raUroad bonds steam and doing a general freight and passenger
business.
Such bonds may be of various kinds: that is, first mortgage,
consolidated mortgage, general mortgage, collateral trust, deben-
■ kinds ^^^> or income bonds. A first-mortgage bond, as its
of raUroad name impKes, is secured by a first mortgage on all or
a part of the property of the railroad company. A
consoUdated-mortgage bond usually is secured by a first mortgage
on a portion of the road and by a jimior mortgage on the rest. A
general-mortgage bond usually is secured by a junior mortgage on
all or most of the road. A collateral-trust bond is secured, as a rule,
by deposit with the trustee of stocks or other bonds or both.' A
debenture bond may be described as a long-term note without
security other than the general credit of the company.^ An income
bond is a bond the interest on which is payable when earned. Any
one of the above kinds of bonds may be convertible, although the
usual form is the convertible debenture, that is, a long-term note
of the company convertible into stock.
In addition to the above kinds of securities, all which may be
Equipment Called Strictly railroad bonds, there are equipment
bond*s*™d°hort- bonds* issucd for say 90 per cent of the cost of new
tenn notes equipment and payable in annual or semiannual in-
' Sometimes an entire issue of first-mortgage bonds is deposited, as in the case of
PSre Marquette Railroad (Lake Erie & Detroit River Railway) 4^% bonds, due Au-
gust I, 1932. The effect of this is to make the collateral-trust bonds substantially a
first mortgage on the property covered by the collateral.
' In Massachusetts there have been issued by various railroad companies, such as
the Boston & Albany Railroad, the Old Colony Railroad, and the Boston & Maine
REuhoad, so-called "plain" bonds. These bonds are debentures with a provision
that no mortgage can be placed on the property without including the debentures.
See Acts igij, chap. 784, sec. 15, and Acts 1854, chap. 286, sec. 3.
* The title to the equipment rests usually with the_equipment bondholder until
the last installment is paid oS.
STEAM-RAILROAD BONDS 163
stallments covering a period of perhaps ten years; terminal bonds,
secured on freight or passenger terminal property including real
estate, and often guaranteed by railroad companies; and short-
term notes, having usually from one to three years to run.
The considerations which determine the strength of railroad
bonds are considerably different from those applying „ ., , , ,
. . ^\ •' ° Railroad bonds
to government, state, or mumcipal bonds. The latter payable not
classes are payable out of taxes, whereas raihroad froS property
bonds are payable out of the property or earnings of " **™°s^
the corporation.
In considering the safety of railroad bonds, the vital Leading fac-
questionsare:- 'Xlf^^
(i) Relation of assets or property to debt.^ ^°^ ''°°<*s
(2) Relation of net earnings to fixed charges.
In case of default in interest or principal of mortgage bonds, the
bondholders have the right to foreclose on the property, just as the
holders of real-estate mortgages have the right in case Remedies for
of default to foreclose on the real estate. In the case non-payment
of default on plain or debenture bonds, the bondholders have the
right to sue at law on the bonds and also on the coupons, but
stand on no better footing than other imsecured creditors.^ As far
as legal rights go, first-mortgage bondholders have the right to
have their entire claim paid from the proceeds of foreclosure sale
before anything goes to the holders of second-mortgage or deben-
ture bonds. As a matter of history and practice, however, holders
of defaulted first-mortgage bonds often have had, like other bond-
holders, their claim satisfied in reorganization through the issue of
new securities in place of their old bonds.' This subject will be dis-
cussed more fully later on in this chapter.
' In determining the strength of collateral-trust bonds or guaranteed bonds, there
are two or more companies to be considered instead of one; that is, in the case of
collateral-trust bonds, not only the issuing corporation, but also the corporation or
corporations responsible for the value of the collateral; and in the case of guaranteed
bonds, not only the issuing but the guaranteeing corporation.
* In England the word "debenture" usually implies a charge upon the property
of the corporation and a priority over subsequent creditors and over existing creditors
not possessing such a charge. Depending, of course, on the terms used in each case,
it may be said, in general, that a debenture in England partakes of the nature of an
equitable mortgage. See Jones, Corporate Bonds and Mortgages (3d ed.), sec. 32.
' It is to be remembered that in many railroad receiverships and reorganizations
certain underlying issues are not in default and are not disturbed at all.
164 AMERICAN AND FOREIGN INVESTMENT BONDS
Beginning in England and in this country in an important way
in the early thirties, the railroad business has shown an enormous
Beginnings and almost continuous growth from that time until
o?th?rdiroad the present. The first railroad of any importance in
business England was the Liverpool & Manchester Railway
opened for public traffic in 1830 "with eight of Messrs. Stevenson
& Co.'s locomotive-engines." ' In the United States, the first im-
portant railroad was the Baltimore & Ohio, which had in operation
twenty-three miles of road in 1830. It was for two years thereafter
worked with horse power. ^ Among other early railroads in the
United States were the Boston & Providence, the Boston & Lowell,
the Erie, the Philadelphia & Reading, and portions of the New
York Central and Delaware & Hudson systems. A short time
before and not long after the Civil War many of the western rail-
roads were built, such as the Chicago, Burlington & Quincy, the
Chicago, Milwaukee & St. Paul, the Chicago & Northwestern, the
Illinois Central, the Atchison, Topeka & Santa F6, and the Union
Pacific. In 1832, there were in operation in the United States only
229 miles of line; in 1912, there were in operation 246,816 miles.'
Outside of pubUc securities and possibly real estate, railroad
securities are the best-known medium of investment throughout
Steam railroad the civilized world. Until the past fifteen or twenty
have bietfa years in this country, steam raihoad bonds prac-
mSimnof tically havc divided with govermnent, state, and
investment municipal issucs the entire bond market.
In our opinion there are many considerations, however, which
Conditions should prompt investors to use great care in select-
surrounding j^g raikoad bonds. It is to be remembered: (i) that
the railroad . ° ,.,,_., r,
industry caU m most cases, railroads m the Umted States are en-
for the exer- , . ^.^. , . ^i ^ • •
dse of great gaged m a competitive busmess, that is, m any given
lart of ' ^ territory of any considerable size, there are usually
investors ^^q qj more important railroad systems competing
' Alexander Gordon, A Treatise on Elemental Locomotion, etc. (London, 1836), p. $5.
• Poor's Manual of Railroads for 1872-73, p. xxvi. The first tram-road in the
United States was opened in 1826. It ran from the Quincy Granite Works in Massa-
chusetts to the Neponset River and was operated with horse power. (Poor's Manual
for i86g-7o, p. xxii.)
' Poor's Manual of Railroads for igis. Introduction, p. cxxxvii, and Interstate
Commerce Commission, Twenty-fifth Annual Report on the Statistics of Railways in
fZv {/Mtted 5fii(» (Washington, 1914), p. II.
STEAM-RAILROAD BONDS
i6s
with each other more or less keenly; (2) that the gross income of
railroads, owing to the fact that it is derived in most cases largely
from the movement of freight, may fall off a good deal in times of
general business depression; (3) that the railroads have been and
are now subject to dual and more or less conflicting regulation by
federal and state authorities; (4) that, owing to a variety of causes,
the cost of financing and operating the railways, particularly during
the past fifteen years, has risen without the railways having been
able to obtain a sufl&cient increase in earnings to offset the increased
cost. These conditions, combined in many cases with incapable or
dishonest management, have led from time to time to very unfortu-
nate results for investors.
With a few notable exceptions — of which we may mention now
the New York Central, the Pennsylvania, the Chicago, Burlington
& Ouincy, the Chicago, Milwaukee & St. Paul, and „ .
^ -" ' ° ' ' Receiverships
the Illinois Central — the important railroad systems and reorgani-
now serving the United States have been in the hands
of receivers or have been reorganized, in whole or in part, from one
to three times. Out of a total bonded debt for aU roads, January i,
187s, of about $2,000,000,000, there were in default at some time
between September 20, 1873, and January i, 1876, bonds amount-
ing to $783,967,665.1 The following table " shows the number,
mileage and total capitalization of railroads placed in the hands of
receivers for the years involving the largest total capitalization
from 1876: —
Year
Number of roads
Miles 0} road
Bonds and stocks
1876
1884
1893
1908
1913
191S
42
37
74
24
17
12
6,662
11,038
29,340
8,009
g,020
20,143
$467,000,000
714,755.000
1,781,046,000
596,359,000
477,780,820
1,070,808,628
On June 30, 1894, there were in the hands of receivers 192 rail-
ways operating 40,819 miles of road and with a total capitalization
1 Commercial and Financial Chronicle, vol. 22, p 76.
• Railway Age Gazette, December 31, 1915 (vol. 59), p. 1222.
l66 AMERICAN AND FOREIGN INVESTMENT BONDS
of about $2,500,000,000.' The roads in the hands of receivers at
this time operated nearly one fourth of the mileage and had nearly
one fourth of the total capitalization of all the railroads in the
United States.^ In October, 1915, there were in the hands of re-
ceivers 41,988 miles of road with a total capitalization of $2,264,-
002,178.'
A variety of causes may be given to account for these experi-
ences, but the leading reasons may be given as follows: (i) Over-
building of railroads or building ahead of the growth
of railroad of the country; ^ (2) heavy bonded debts and fixed
trou es charges; (3) unrestrained competition; (4) increased
costs of labor, materials, and supplies, and increased taxes; (5)
mismanagement, misjudgment, or lack of integrity of those in con-
trol; (6) excessive interference on the part of legislatures, commis-
sions, and other government bodies; (7) the industrial depressions
following the panics of 1873, 1884, 1893, and 1907.^
.„ , . , A brief statement* of some of the forms which rail-
Difficulties of . ..,..,,
individual road difficulties took m cases 01 certam mdividual
railroads may be of interest. (See page 167).
Since the receiverships following 1893, there have been two
periods in which railroad difliculties have become of considerable
importance: one after the panic of 1907, when such roads as the
* Interstate Commerce Commission, Seventh Annual Report on the Statistics of
Railways in the United States (Washington, 1895), p. 10.
' Ibid., pp. 12 and 41.
' Railway Age Gazette, October 15, 1915 (vol. S9)> p. 6y6. The figures include
two small Canadian roads.
• Between 1870 and 1885, the total miles of road in the United States increased
from 52,922 miles to 128,320 miles, or over 142 per cent; between i88o and 1895, a
period of fifteen years, the total mileage increased from 93,262 miles to 181,115 miles,
or over 94 per cent. (See Introduction to Poor's Manual of Railroads for igiz, p.
cxxxvii.)
■i See Commercial and Financial Chronicle, vol. 22, p. 76; Investors' Supplement
of the Commercial and Financial Chronicle, October 25, 1884, p. i; Introduction to
Poor's Manual of Railroads for 1885, pp. v to x; Investors' Supplement of the Com-
mercial and Financial Chronicle, March 31, 1894, p. 2; Poor's Manual of Railroads
for i8qs, pp. V to viii. (The depression of 1913 and the effect of the European War
might be added.)
' The material for the accompanying table has been taken from Stuart Daggett,
Railroad Reorganization (Boston and New York, 1908), pp. 16-17, 20-22, 34-40,
48, SI, S3-S4, 58-59, 61, 75, 77, 81, 96-101, 118, 121-26, 158, 164, 166-68, 175-78,
193, 196-97, 199, 202, 204-09, 221-24, 228-29, 231-33. 235-36, 240, 264-65, 267,
280-81, 284, 286-87, 289.
STEAM-RAILROAD BONDS
167
Raikoad
Date
Erie.
(NewYork&ErieR.R.)
(Erie Railway.)
(New York, Lake Erie
& Western Railroad.)
Nofthem Pacific Rail
road.
Philadelphia fir Reading
Railroad.
Form of failure.
Atchison, Topeka &•
Satiia Fi Railroad.
Southern system.
(Richmond & W.P.
Terminal Ry. & Ware-
house. Richmond &
Danville R.R. Central
RR.& Bkg. of Georgia.)
Union Pacific Railway.
BaUimore &• Ohio Rail-
road,
1842
187s
1884
1893
187s
1893
1880
1884
1893
1889
1893
1892
1893
1896
Causes of trouble
Assignment.
Receivership.
Receivership.
Default followed by reor-
ganization without re-
ceivership or foreclosure.
Rewiver^ip.
Receivership.
Receivership.
Receiverdiip.
Receivership.
Receivership.
Reoi^nizatioD without
receivership or foreclo-
sure.
Receivership.
Receiverships.
Receivership.
Receivership.
Difficulty of getting enterprise under
way.
Rate war with N.Y. Central. Heavy
storms and ice floods, 1857. Panic of
1857 and depression which followed.
Gross overcapitalization and waste of
assets under Gould and Fisfc._ Inade-
quacy of previous reorganizations.
Severe competition. Falsification Of
accounts and payment of dividends
not earned. Six-foot gauge.
Heavy capitalization of previous reor-
ganization. Irregularities. Failiure
of Grant & Ward.
Failure of previous reorganization to
reduce fixed charges sufficiently. Pro-
hibition of pooling. Unprofitable
lease of the N.Y., Penn. & Ohio.
Lack of population and business in ter-
ritory served. Failure of Jay Cooke
& Co. before completion of the road.
Extensive building and purchase of un-
profitable branches. Unprofitable
leases. Unwise distributions to stock-
holders.
Heavy capitalization. Excessive and
undiscriminating purchases of coal
lands.
Inefficiency of previous reorganization.
Unprofitable leases and purchases.
Payment of dividends not earned.
Lack of profit in coal-holdings of the
Philadelphia & Reading Coal & Iron
Company. Unprofitable leases. Pur-
chases of stock of the Boston &
Maine Railroad and other New Eng-
land railroads to an extent not justi-
fied by the resources of the Reading.
Competitive overbuilding and exten-
sions into thinly settled territory.
Overexpansion, including acquisition of
the St. Louis & San Francisco Rail-
road. Conversion of income bonds of
previous reorganization into bonds
carrying a fixed charge. Misrepresen-
tation of the earnings and true condi-
tion of the company.
Large part of mileage unprofitable.
Poor physical condition. Graft and
mismanagement.
High original cost of construction, in-
cluding the Credit Mobilier scandal.
Consolidation with the Kansas Pacific
and Denver Pacific Railroads on ab-
surd terms, and acquisition of other
lines at the dictation and for the
{>rofit of Jay Gould. Severe compe-
tition. Rapid extension of unprofitable
branch line mileage.
Excessive competition, tbtough rate-
cutting and other methods, leading
to a ^adual weakening of the whole
financial structure of the company.
Irregularities of those in control.
Payment of dividends not earned.
l68 AMERICAN AND FOREIGN INVESTMENT BONDS
Seaboard Air Line, Chicago Great Western, Western Maryland,
and Wabash were placed in the hands of receivers;
Railroad diffi- , ,. ^ , ,^^.„_
cuities 1907 and another ui 1913 to 1915, when the St. Louis & San
1913 191 prancisco, Cincinnati, Hamilton & Dayton, Interna-
tional & Great Northern, Rock Island, Missouri Pacific, Missouri,
Kansas & Texas, and many other roads were placed in the hands
of receivers.* The difficulties of these railroads have been too
recent to make possible a careful and impartial statement of the
special causes of failure.
A consideration of the specific causes of many of our earlier rail-
road troubles shows that these difficulties were caused partly by
the general conditions surrounding railroad operation
causes of rail- and partly by the lack of judgment or unscrupulous
management of those who controlled the properties.
Just how far one set of causes and how far the other affected the
results in any given case it is impossible to say.
In 1887, a step was taken which has led already to important
restraints on the management of railroads by private interests.
^ . vf V . This was the establishment of the Interstate Com-
Establisnment , , . . , ...
of the merce Commission.^ Originally this commission sim-
Commerce ply heard cases of alleged unjust discrimination in
ommission service and rates, and the Commission found most of
these cases to be not well founded.'
Later the Commission received additional powers. In 1906, it
obtained the power not merely to set aside existing
Increase in ., , .
powers of the railroad rates as imjust or unreasonable, but to estab-
ommissiou ^^-^ ^^^ ones.* In 1910, it obtained authority to sus-
' In October, 1915, it seems reasonable to say that the raikoads as a whole have
"turned the comer," for the time being, from their most acute troubles.
^ An act to regulate commerce, approved February 4, 1887, and in effect April 5,
1887 (24 Stat. L. 379), as amended by an act approved March z, 1889 (25 Stat. L.
855) ; by an act approved February 10, 1891 (26 Stat. L. 743) ; by an act approved
February 8, 1895 (28 Stat. L. 643); by an act approved June 29, 1906 (34 Stat. L.
584); by a joint resolution approved June 30, 1906 (34 Stat. L. 838); by an act ap-
proved April 13, 1908 (35 Stat. L. 60); by an act approved February 25, 1909 (35
Stat. L. 648); by an act approved June 18, 1910 (36 Stat. L. 539); by an act approved
August 24, 1912 (37 Stat. L. 566); by an act approved March i, 1913 (37 Stat. L.
701). See U.S. Compiled Statutes (1913), vol. 4, Title lviA, chap. A, sees. 8563-8604.
' See Charles Lee Raper, Railway Transportation (New York and London, 1912)
p. 264. Also Reports, Interstate Commerce Commission, passim.
* Act approved June 29, 1906 (34 Stat. L. 584).
STEAM-RAILROAD BONDS 1 69
pend changes in rates pending a hearing. 1 This power to suspend
rates is the power of which the railroad managers have complained
at times so bitterly. The Commission in these matters may act on
its own initiative.
In addition to the regulation exercised by the Interstate Com-
merce Commission, there has been an immense amount of regula-
tion and attempted regulation by state legislatures ^^ uiation b
and later by state public-service commissions. Accord- state legis-
ing to James J. Hill: "Within three years, ending in pubUc-service
1907, twenty-five States enacted car-service laws,^ commissions
twenty- three regulated train service and connections, twenty- two
fixed maximum passenger rates, nine enacted maximimi freight
rates, thirty-six regulated the general corporate affairs of common
carriers." * To be included, perhaps, in the last-named class of
legislation may be mentioned laws forbidding combination and con-
solidation, compelling changes in construction of road or rolling-
stock, and shortening the hours of labor of employees.* Many of
these laws were enacted without any adequate examination or
proper understanding of their fairness, and many of them later
were declared xmconstitutional by the courts.*
In general it may be said that, under present conditions, the rela-
tion of steam railroads to the public is in great confusion. Unhke
street-railway, gas, and electric light properties lo- j^gi^^ji^^Qf
Gated wholly within one State, most of the steam rail- steam raikoads
roads are subject to regulation both by the Federal is in great
Government and by individual States. The viewpoint '^° "^'°°
of the railroad men is expressed as follows: "A misdirected public
opinion is demanding rates too low, taxes too high, wages too high,
service too elaborate, and there are not cents enough in the dollar
to meet all these demands and still permit the business to be attrac-
tive enough so the man with a dollar will invest it." ® It is to be
' Act approved June 18, 1910 (36 Stat. L. 539, sec. 12).
' For a discussion by railroad interests of the so-called "full-crew laws," see
Bureau of Railway Economics, The Arguments for and against Train-Crew Legisla-
tion (Washington, D.C., 1915), consecutive no. 73.
' James J. Hill, Highways of Progress (New York, igio), p. 272.
< For citation of some of these laws, see Appendix, pp. 305-306.
' For examples of such laws which have been held unconstitutional, see Appen-
lix, pp. 306-307.
' Howard Elliott, The Truth About the Railroads (Boston and New York, 1913),
pp. IS4-SS-
I70 AMERICAN AND FOREIGN INVESTMENT BONDS
noted that at least three different bodies are in a position to inter-
fere with the net income of raihroads: that is, (i) the Interstate
Commerce Commission may suspend or reduce rates; (2) the state
legislatures or commissions may reduce rates and may prescribe
regulations which will increase expenses; and (3) arbitration boards
may raise wages. *
Furthermore, the regulation of any given railroad by the States
through which its lines run may conflict, not only as to service and
rates, but in the matter of issue of new securities.
States of issues Interstate railroads under present conditions some-
o secun les tij^gs have to obtain the authority of two or more
States in order to finance themselves. Examples of this may be
found in our New England railroads, where, for instance, the con-
sent of New York State as well as of Massachusetts is necessary
for the issue of bonds by the Boston & Albany Railroad; of Maine,
New Hampshire, and Massachusetts for the issue of securities by
the Boston & Maine Railroad; and of Massachusetts and New
York for security issues by the New York, New Haven & Hartford
Railroad. 2
In view of the fact that interstate traffic, according to James J.
HiU, constitutes from 65 to 97 per cent of the total traffic over
large areas of the cotmtry,' and in view of the diffi-
probiemmay* culty of distinguishing between state and interstate
by theTedeiai traffic,^ it would Seem that the final solution of this
Government difficult qucstion lies in some form of control by the
alone Ai i
Federal Government alone.
A step in this direction was attempted in the decision of Judge
Sanborn, of the United States Circuit Court, in the so-called
Minnesota Rate Cases.* The legislature of the State of Minnesota
' Arbitration, however, is not compulsory. See "An Act providing for mediation,
conciliation, and arbitration in controversies between certain employers and their
employees," approved July 15, 1913 (Public Laws of the United States of America
r63d Cong., ist Sess., 1913], chap. 6, 38 Stat. L. part i, p. 103).
' Maine, Laws 1913, chap. 129, sec. 35; Massachusetts, Acts igi3, chap. 784,
sec. 16; New Hampshire, Laws zgil, chap. 164, sec. 14a, as amended by Laws 1913,
chap. 14s, sec. 14; New York, Consolidated Laws of the State of New York (1910),
vol. DC, chap. 48, sec. sSt and chap. 49, sec. 8, par. 10.
' Highways of Progress, p. 280. See also Raper, Railway Transportation, p. 252.
* See Marshall M. Kirkman, Railway Rjdes and Government Control (Chicago &
New York, 1892), pp. 295-301.
» Shepard s. No. Pac. Ry. Co., 184 Fed. 763. (1911.)
STEAM-RAILROAD BONDS 171
had enacted statutes reducing passenger fares within that State
about 33^ per cent and reducing freight charges on Decision of
certam commodities withm the State about 7.37 per jn'MinneJota
cent. By orders of the Minnesota Railroad and Ware- ^^'^ ^^^^
house Commission, general merchandise freight charges on ship-
ments wholly within the State were reduced by from 20 to 25 per
cent, and certain specific charges on freight shipped from distribut-
ing points just within the border of the State to other points in
the State were reduced. Suits were brought by shareholders of the
raikoads affected involving the question whether the orders of ihe
commission, and the acts of the legislature described, substantially
burdened and regulated interstate commerce on the railroads of
these companies. Judge Sanborn found that " each of the acts and
orders challenged has the natural and necessary effect substantially
to burden and directly to regulate interstate commerce, to create
undue and unjust discriminations between localities in Minnesota
and those in adjoining States, and it is unconstitutional and void."
He said further: "To the extent necessary completely and effectu-
ally to protect the freedom of and to regulate interstate commerce
the nation by its Congress and its courts may affect and regulate
intrastate commerce, but no farther. To the extent that it does not
substantially burden or regulate interstate commerce a State may
regulate the intrastate commerce within its own borders, but no
farther. If the plenary power of the nation to protect 'the freedom
of and to regulate interstate comanerce and the attempted exercise
by a State of its power to regulate intrastate commerce, or the
attempted exercise of any of its other powers, impinge or conflict,
the former must prevail and the latter must give way, because the
Constitution and the acts of Congress passed in pursuance thereof
are the supreme law of the land, and ' that which is not supreme
must yield to that which is supreme-'" This decision, it seems to
us, would have the practical effect of giving the Federal Govern-
ment substantial control of almost ah railroads.
The decision later was reversed by th§ United States Supreme
Court ^ in an opinion delivered by Mr. Justice Hughes. The court
took the position that (i) although the power of Congress over
interstate commerce is paramount, and (2) although a State has
> Simpson et d. v. Sbepard, 230 U.S. 352. (1913.)
172 AMERICAN AND FOREIGN INVESTMENT BONDS
no power to regulate directly interstate commerce, and (3) al-
Decision of the *^°"sli> whcncver CongTcss exercises its power over
United States interstate commerce in any respect, no state action
Supreme Court , i • i it ..,.,,
intheMinne- of any kind Can modify or unpair directly or m-
sota Rate Cases (jjj.g(,j.iy g^jj national action, yet (4) the several
States have power, in the absence of action by the Federal Govern-
ment, to regulate their own intrastate commerce and (5) state
regulation of intrastate commerce is not void by reason merely of
its indirect effect on interstate commerce, unless it conflicts with
some actual exercise by Congress of the national power over inter-
state commerce.
In the Shreveport Rate Cases, ^ in which also the opinion was
deUvered by Mr. Justice Hughes, the court took the position that
Comparison of where the Interstate Commerce Commission previ-
shreveport^"'^ ously had fixed an interstate rate on a basis higher
Rate Cases ^gj^ ^j^Q^^_ permitted by the State of Texas for intra-
state rates, the interstate rate should prevail. In the Minnesota
cases, the railroads could avoid that "unjust discrimination"
which Congress had forbidden by reducing their interstate rates to
the basis of the Minnesota intrastate rates; but in the Shreveport
cases, the railroads could not do this, because the rate already fixed
by the paramoimt national authority was higher than that allowed
by the state authorities. The only alternative was to disregard the
Texas intrastate rates.
We have discussed these two cases rather fully for the reasons
that they are both fairly recent and also because they bring out the
Significance of ever-recurring difficulties of harmonizing state and
Court decSilns federal control of railroad rates. While the two deci-
in the two cases gjons of the Supreme Court are not inconsistent, it
may be fair to say that in one case emphasis is laid on the state
power over rates, whereas in the other it is laid on the federal
power over rates.
A possible escape from this situation may be either (i) the fed-
„ , ... eral licensing of all railroads doing an interstate busi-
Federal license / \ , r t ■, • • r n •
or federal ness or (2) the federal mcorporation of all mterstate
mcorpora on j-aUroads. Under the first plan, the railroads would
> Houston, East & West Texas Railway et al. v. United States et at., 234 U.S.
342. (1914-)
STEAM-RAILROAD BONDS 1 73
retain their state charters, but would obtain permission to do an
interstate business only on such terms as the Federal Government
might impose, which permission might amount practically to exclu-
sive federal regulation. Under the second plan, the railroads doing
an interstate business could get rid entirely of state regulation. In
the words of the former Commissioner of Corporations, "The one
merit of the federal incorporation plan is that it is based upon a
clean-cut, legal theory, that it brings the entire matter of interstate
commerce under one jurisdiction, and reduces to a minimum the
friction that must occur between federal and state authorities in
the attempt on the part of the Federal Government to regulate
interstate commerce." ^ Either federal licensing or federal incor-
poration of the interstate railroads would be a long step toward
exclusive federal control of all the railroads, and therefore toward
the solution of this phase of the railroad problem.
We have spoken of exclusive federal control as probably the best
solution of this conflict between federal and state authority over
the railroads. We have suggested federal licensing or Government
federal incorporation of interstate railways. There is ownership ,
another alternative. That alternative is government ownership.^
Government ownership may work out in two ways: (i) Owner-
ship and operation by the Government; (2) ownership by the
Government and lease to private companies for oper- „
r- r I- Government
ation. This latter method was recommended in 1881 ownership may
by an Italian commission which investigated the
entire subject of government ownership in practically all coun-
tries.^ In general, however, we will discuss government ownership
as being sjoionymous with government operation.
' Report, Commissioner of Corporations, December, 1904, Appendix C, pp. 61
and 62.
2 The only experiments which the United States Government has made along
these lines are: (i) Panama Railroad, which the Government piirchased in 1904 and
has since operated, and (2) the proposed federal railway in Alaska. Neither of these
experiments is likely to be of any particular significance in connection with the broad
question of government ownership. (For Panama Railroad, see Poor's Manual of
Railroads for igi5, pp. 1912-13, and Annual Reports of the Panama Railway Com-
pany. For act authorizing the President of the United States to locate, construct,
and operate railroads in the Territory of Alaska, approved March 12 1914, see
Public Laws of the United States of America, no. 69, 63d Congress, 38 Stat. L., part j,
p. 30S-)
• Raper, Railway TransportoHon, pp. 109-10.
174 AMERICAN AND FOREIGN INVESTMENT BONDS
The extent to which government ownership of railroads prevails
throughout the world is not, perhaps, fully appreciated. In
Europe, out of the total mileage in 1912 of 207,295
government milcs, 107,663 miles, or SI. 9 per cent, were state-
owners p owned.' Great Britain was the only important
European country which had no state-owned railways. In Asia,
58 per cent of the mileage, in Africa, 59.7 per cent, and in Aus-
tralasia, 93.6 per cent of the mileage was state-owned. The total
mileage of the world for 1912 was 639,621 miles, of which 188,258
miles were state-owned.^ This becomes even more striking when we
remember that the United States alone in 1912 had 241,056 miles
of road, all privately owned.
There are many strong arguments in favor of government
ownership and operation of all the railways in the United States.
Arguments in In Order to get the bearing of the whole subject on
goveri^ent raihoad credit, we will summarize the leading argu-
pwpership ments as follows: (i) It would do away forever
with the perplexing conflict between federal and state regulation;
(2) it would solve the still more dif&cult problem of trying to
prevent by regulation so-called discrinunation between persons
and places and yet at the same time forcing under the Sherman
Act ' competition between the railroads; (3) it might lead to a
comprehensive if not entirely economical use of railroads and water-
ways for the benefit of the whole country; (4) it would put an
end to the immense railroad lobby system by which in the past
attempts, too often successful, have been made to influence legis-
latures and courts; (5) it would lead, if properly managed, to
a greater standardization of service; (6) it should result in elimi-
nation of many expenses at present necessary to the railroads, such
as complete executive staffs for each railroad and solicitors whose
business is simply to get freight for one railroad as against another;
' Out of a total mileage of 37,973 in Germany, 34,604, or gi.i per cent, was state-
owned; in France out of a total mileage qI 39^668 only 5,509, or 18 per cent was
state-owned.
' Figures from London Times, October i, 1912, p. 15 ("The World's Railwaj^"),
and based on Archiv fiir Eisenbahnwesen, May and June, 1912, published by the
Prussian Ministry of Public Works, Berlin. See also Samuel O. Dunn, Government
Ownership of Railways (New York and Londo^, 1915), pp. 381-84.
' See act approved July 2, 1890, 26 Stat. L. 2og,US. Compiled Statutes (igoi), vqL
3, p. 3200.
STEAM-RAILROAD BONDS I75
(7) it might make less difficult the raising of the immense amounts
of new capital which almost all railroad men agree are necessary in
order that the railroads may perform adequate service; (8) it
might have, if properly handled, the effect of knitting together the
country still more closely than at present and of bringing the people
in closer touch with the Government. Some of these objects could
be attained, to be sure, without govenmient ownership, but they
all might be accomplished under that system.
Against government ownership and operation of railroads in the
United States at the present time may be urged the following:
(i) Operation of the railways by the Government Arguments
probably would result, as it has in Europe, in a set of gOTe°rment
rules or principles for service and rates too rigid prop- owne'si^P
erly to serve and develop the country; (2) allowing for the loss
in taxes, it would probably result, as it has in most European
countries, with the possible exception of Germany, either in
a net loss or a very slight profit from operation; (3) there is no
reason to suppose that it would result, any more than it has in
Europe, in better freight service or in lower freight rates; (4) it
would place over 1,800,000 men,' the present employees of the
railroads, with their families, imder possible political domination,
a situation likely to result in injustice to the men and in danger
to our system of government; (5) it would entail on the Federal
Government the creation of a huge debt, the safety of which would
depend to a large extent on ihe success with which the railroads
were operated; (6) the strongly individualistic character of our
people, the complicated structure of our government, and the
many widely scattered large centers of wealth and population, as
against the highly centralized conditions in such coxmtries as
France and Germany, would indicate less success for government
ownership in this country even than in Europe; (7) until regula-
tion has been tried thoroughly on the most intelligent and most
modem lines government ownership is imnecessary.
The experience with state-operated railways in Europe and else-
where has not been of a kind to induce the United „ ,
, Results of
States to enter on the expenment. The most sue- state operation
cessful state railways abroad have been the Prus- '" ^°^
' Interstate Commerce Commission, Twenty-sixth Annwtl Report of the Statistics of
Railways, p. 23.
176 AMERICAN AND FOREIGN INVESTMENT BONDS
sian. These have been operated so as to give excellent and cheap
passenger service, fair freight service, and so as to show to the Gov-
ernment a considerable net income above all charges. They have
been managed with all the military efficiency of the Prussian Govern-
ment. It is questionable whether the operation of the Prussian rail-
ways has been for the best interests of iadustry and commerce.^
The state railways of Japan, with practically the lowest freight and
passenger rates of any railways in existence, have been operated
with distinct financial success. This has been made possible by
the efficiency of the Government and by the low cost of Uving.*
The operation of the state lines in Italy, whatever the reasons, has
been so far notably unsuccessful in almost aU respects.' The op-
eration of the state railways in Austria has not resulted in par-
ticularly low rates and it has resulted in a net loss to the Govern-
ment.'* The Hungarian state railways usually have earned less
than their interest. The same is true to a greater or less degree
of the state railways in France, Russia, Belgium, Canada, Argen-
tina, and even Germany, outside the Prussia-Hesse lines.* The
Swiss state-operated railways have sought to please all the people
by lowering rates, increasing faciUties, and raising wages. Roads
which under corporate management had been making a good
showing have shown imder ten years of govenunent administra-
tion a deficit.® On all state operated railways, except possibly in
Prussia and Japan, the tendency has been to increase the ntun-
ber of employees beyond all reason.^ It is perhaps fair to say that,
with the exception of Prussia and Japan, state operation has not
justified itself on economic groimds.* On political grounds, it may
have done so, though this always wiU be a matter of opinion.^
' Dunn, Government Ownership of Railways, pp. 130, 310-13, 325; Raper, Railway
Transportation, pp. 143, 150, 155, 164, 303; Logan G. McPherson, Transportation in
Europe (New York, 1910), pp. 168-69.
» Dunn, pp. 296, 313-14, 324-26.
» Dunn, pp. 315-16; Raper, pp. no, 119-20; McPherson, pp. 173-75.
* Dunn, p. 317; Raper, p. 295; McPherson, p. 173. ' Dunn, pp. 303-30.
' McPherson, pp. 172, 200. For a doubt raised as to whether the Swiss state rail-
ways have shown a net profit or a net deficit, see Dunn, p. 324.
' McPherson, pp. 199-200.
' For another statement of financial results of government operation in Germany,
France, Belgiimi, Holland, Switzerland, Russia, Austria-Hungary, and Italy, see
McPherson, pp. 168-75.
' The great war in Europe has led to military or govenunent operation of most of
the railways in the countries at war.
STEAM-RAILROAD BONDS 177
Regulation is not open to many of the objections that apply to
government ownership. It has been in Great Britain and in the
United States a natural development and one con- Regulation not
sistent with the individual initiative of the people open to many
and the democratic nature of their government, tions to govem-
While the principles and methods of regulation to be °""' "^^-^^i-ip
applied have at times been in great confusion, the broad outlines
to-day are becoming pretty well defined.
Regulation in Great Britain, where all the railways are privately
owned, has been based on practical expediency. In Great Britain
and Ireland, the railways are under the supervision „ , ,. .
, . . „ , , -r. M , ^ , /-I Regulation m
01 a commission called the Railway and Canal Com- Great Britain
. . , . r. . , , and Ireland
mission, composed of five members, servmg a term
of five years: two members appointed by the Crown and three
ex-officio. Of the appointed members one must be an expert on
railway transportation. The ex-officio members are, in England,
the Lord Chancellor; in Scotland, the Lord President^of the Court
of Session; and in Ireland, the Lord Chancellor of Ireland. These
ofl&cials can in each case designate a judge of the highest court to
serve on the Railway and Canal Commission. The Commission at
work must be composed of the two appointed members and one
ex-offi^io, the former to be judges of fact and the latter of law. Regu-
lation in Great Britain has tended toward the monopoly prin-
ciple and has gone on the basis of minimum interference with the
operation of the railways. It has been, on the whole, fairly eflident
and satisfactory.*
In France, where nearly five sixths of the mileage is operated
by private companies,'' the railways are under the control of the
Ministry of Public Works. Attached to this Ministry Regulation
are six departments, one for each of the large systems '° France
including that operated by the State. Supervision is divided on
the lines of (i) technical control; (2) commercial control; (3) finan-
cial control. There is a commercial advisory coimcil in which two
* Raper, pp. 52, 55, 58, 100, 212. See also Dunn, pp. 17-ig.
* In France, the Government has made large advances in the cases of the privately
owned railways in the form of guarantees of interest and dividends. By the end of
1938, unless present plans are changed, all the railways will be amortized and will
become the property of the Government without compensation. (Raper, pp. 72-73;
Dimn, pp. 20-22.)
178 AMERICAN AND FOREIGN INVESTMENT BONDS
elements'are represented: (i) liie Government; (2) commercial and
industrial interests and the general public. French control of the
railways has paid more attention to abstract justice than to prac-
tical expediency. It has represented, perhaps, the masdmvim of
interference. Supervision has covered all important matters of
operation and finance, including the approval of the issue of new
securities. French control of the railways has been strong and
effective, but has been too much inclined to act with rigid uni-
formity.'
We have outlined the systems of regulation in Great Britain
and France for the sake of the light they may throw on our own
railroad problems. These two countries are the only
Europe has '^ , •'
much to teach ones of unportance in Europe havmg a large railroad
regulation mileage under private operation. Germany, Italy,
o rai ways ^^^ Russia, in their machinery for the state operation
of their railways, have many points of interest to any one attempt-
ing to outline a plan of exclusive federal regulation for railways in
the United States.
There have been recently many suggestions, some of them based
on European models, of plans for regulating the railways. There
interstate ^^ ^ general agreement that the Interstate Commerce
Commerce Commission, with its membership limited as at pres-
Commission , ' ^ ^
at present eut, IS physically unable to consider and solve the
to handle vast and complicated problems arising from the
epro em financing and operation of something like 250,000
miles of railroad, traversing forty-eight States, and serving a
population in the neighborhood of 100,000,000. In its magnitude
OutKne for ^'^'^ ™ ^^ Complexity, the problem is entirely dif-
exciusive fed- ferent from that of regulation of railroads in such
in the United a territory as that of Great Britain.
^^^ A possible outline for exclusive federal regulation,
at least of all interstate railways, is as follows: *
(i) Enlarging the membership of the Interstate Commerce Commis-
sion so as to include men experienced in railroad operation, traffic
' Raper, pp. 95 and 100; Dunn, pp. 19-24.
• See Samuel Rea, as quoted in the Annalist (New York), vol. 4, p. 442. E. P.
Ripley, as quoted in the Commercial and Financial Chronicle, vol. gg, p. 1334. See also
Annalist, vol. 4, p. 392. Commercial and Financial Chronicle, vol. 99, pp. 1505, 1509;
Raper, Railway Transportation, passim; McPheison, Transportation in Europe.
STEAM-RAILROAD BONDS 1 79
and finance and also men of broad business experience. This would
be thoroughly in line with the machinery used in some form of
other in France, Germany, Italy, and Russia.
(2) Making the term of office for a long period of years and the com-
pensation sufficient to attract and retain men of the widest experi-
ence and greatest ability.
(3) Dividing the United States into sections for railroad supervision
much as the national banking system has been divided under the
Federal Reserve Act. Such units as the Interstate Commerce
Commission uses in reporting statistics of the railways or any other
convenient units could be used. This division of territory would
follow the precedents set in France, Germany, and Italy.
(4) Compelling the railroads to give reasonably efficient service.
(s) Allowing combination and consolidation of railroad properties
where such action will lead to improved service or lower rates.
(6) Allowing the railroads to charge rates ^ for their services which will
insure efficient and economical operation, allow reasonable provi-
sion for maintenance, depreciation, and obsolescence, and give a
return to the security-holders sufficient to make possible the rais-
ing of new capital.
(7) Having Congress refer to the Interstate Commerce Commission
for investigation and report legislation concerning service, rates,
wages, and other matters affecting the net income of the railways.
(8) Limiting the power to suspend rates without a hearing to a period
not over sixty days, after which, unless otherwise ordered, advanced
rates shall become effective.
(9) Supervision by the Interstate Conamerce Commission when effec-
tively organized of tie issue of new securities including amounts to
be issued and the purposes for which the money is to be spent.*
(10) Publicity of accounts.
This general plan could be modified as experience showed its
defects. The adoption of some such plan would increase greatly
the safety of railroad bonds.
In the matter of giving the Interstate Commerce Sarsuper-
Conrniission or some other federal body the authority y>sion of the
..... issue of new
to supervise the issue of new secunties, it is mterest- securities
• For eonfirmation by the United States Supreme Court of broad supervisory
power of the Interstate Commerce Commission over rates, see the so-called Inter-
mountain Rate Cases, decided June 22, 1914. (United States of America, Interstate
Commerce Commission et al., v. Atchison, Topeka & Santa F6 Ry. Co. et al., 234
U.S. 476).
* See Twenty-eighth Animal Report, Interstate Commerce Commission, part i, p. 6$.
l8o AMERICAN AND FOREIGN INVESTMENT BONDS
ing to note that such diverse interests as Mr. James J. Hill, on
the one hand, and the National Association of Railway Commis-
sioners, on the other, agree as to the wisdom of this.^
Regulation of rates — the only other point in this programme
of regulation which we will discuss at the present time — is the
crux of the whole "railroad question." In the regu-
Rates must be. ii-ii •!•
reasonable and lation of rates the fundamental considerations are
compensatory ^-^ofold: (i) The rates must be just and reasonable;
(2) they must not be so low as to be confiscatory. Neither the
States nor Congress itself can force a railroad company to serve
the public without just compensation. What rates are reasonable
and what rates give a fair return to the railroads are questions
very difficult to decide.^
The basis of rate-making in the United States, before authority
was given to the Interstate Commerce Commission to change
Bases of rates, was to charge shippers all that the traffic would
rate-making bear, in connection, of course, with whatever compe-
tition a given railroad had to meet. Since the grant of authority
to the Commission over rates, there has been more of a tendency
than formerly to use the cost-of-service principle as a basis for
rates. This is very largely the practice on the state-owned railways
in Europe. Charging what the traffic will bear usually is best
adapted to developing the country, but it is likely to lead to dis-
criminations; ^ charging on the basis of the cost of the service is
likely to be too rigid to allow for the proper growth and develop-
ment of the country.
Very often not only what is a proper rate, but what is a possible
rate has to be decided. In discussing the limits of high and low
raihoad rates, Mr. James J. Hill has called attention to the fol-
* Highways of Progress, p. 136. Report of the Committee on Railway Capitali-
zation, Proceedings of the Twenty-fifth Annual Convention of the National Asso-
ciation of Railway Commissioners (Washington), pp. 212-13.
' See Constitution of the United States, Amendment v and Amendment xiv, sec. i.
Act February 4, 1887, Stat. L., chap. 104, sec. i, p. 379. U.S. Comp. Stats. 1913, sec.
8563, and the following of the many cases dealing with this question: Smythe v. Ames,
169 U.S. 466; Lake Shore & Michigan Southern Railway Co. v. Smith, 173 U.S. 684;
and Interstate Commerce Commission v. Brimson, 154 U.S. 447.
' As Mr. Hill has remarked, railroad rates in a wheat country must insure the
profitable raising and sale of wheat, and in a lumber country they must favor the
Ixmiber industry. This is discrimination, but it is discrimination for the purpose of
developing the country. Q. J. Hill, Highways of Progress, pp. 256-58.)
STEAM-RAILROAD BONDS l8l
lowing principles: (i) That the raikoad must obtain a rate which,
in addition to the cost of taxes and a proper allow- ^. ., ... .
- . . , , , Limits of high
ance tor maintenance and other necessary charges, and low rates
will pay interest on its bonds and fair dividends on ^ » ea ra e
its stock; (2) that the shipper must obtain a rate that will enable
him to market his products at a living profit; (3) that the ideal
rate, if it can be ascertained, is one which will result in the greatest
good for both parties — that is, one which will secure to the rail-
road the greatest volume of business and the largest net return
consistent with equal benefits to the producer and shipper. ^
The above principles may be described as the starting-points
for rate-making. The determination, however, not only of what
rates are practicable from the point of view of the ^ , , ,
, , .-, , , , ■, , ■, Federal valu-
common prospenty of the railroads and of the whole atjon of the
country, but also of what rates are reasonable and
compensatory, leads us to the question of railroad valuation. As
is well known, there is now being undertaken, under the general
supervision of the Interstate Commerce Commission, a compre-
hensive valuation of all the railways in the United States.'' This
valuation is at present in charge of Mr. C. A. Prouty, formerly of
the Interstate Commerce Commission.
In discussing the basis on which this valuation is to be made,
Mr. Prouty has said that the following factors must be considered:
Reproduction new; same, less depreciation, dona- Factors to be
tions of cash, land, etc., by Governments, individu- fedSff'*^ "
als, or associations; original cost of all lands and valuation
terminals and present value; all other elements of value and parts
of value assignable to each State. He declares that the work will
involve an accurate map and inventory of the property of every
railroad engaged in interstate business as of June 30, 1914, to-
gether with other maps and plans showing all subsequent addi-
tions to the property. These inventories must be verified by the
Commission with surveying parties going over every mile of road.*
' Highways of Progress, pp. 2S4-SS-
' Amendment approved March i, 1913, to Interstate Commerce Act. See 62d
Cong., 3d Sess., chap. 92, 37 Stat. L. 701.
' Speech of Mr. Prouty before Chamber of Commerce of the United States, Febru-
ary II, 1914, as reported in the New York Times Annalist, February 16, 1914, p. 196.
Mr. Prouty since has estimated the total cost of ascertaining the value of all the prop-
1 82 AMERICAN AND FOREIGN INVESTMENT BONDS
Mr. Prouty points out the difficulties of using this valuation as
conclusive in making rates. "It is impossible," he says, "to shake
„ , . a single railroad free from every other and fix its
Valuation not , ,,.-,. .,.
conclusive in Charges upon the basis of a fan: rettirn upon its fair
value, as you would m case of a gas or water plant.
The rate established for one, of necessity influences and frequently
absolutely determines the rate of all." ' A rate calculated to give
a return, for instance, of 6% on the value of a road advantageously
situated and with a large business might mean a return of less
than 6%, and sometimes very much less than 6%, on the value of
other roads competing with it.
In summing up the benefits to be derived from valuation of the
railways, Mr. Prouty says, "It can be known with certainty
Benefits to be ''^^ether the general level of rates is or is not too
derived from high." He coutiuues : "While this valuation wiU be of
according to incidental benefit to the investor, while it is essential
r. routy ^^ ^^ work of the rate-making tribunal, it seems to
me that its greatest immediate value is political. The state of the
public mind toward our railways is such that this information is
absolutely necessary." ^
We ourselves are thorough believers in this valuation of the
railways by federal authorities. While it will take imdoubtedly
many years and many millions of dollars to complete,
valuation and while it will not be final, or perhaps even im-
ques on portant, in determining the rates to be charged by
any given railroad, it wiU, in our opinion, do these three things: (i)
It will make possible at least an approximation of the value of the
property on which a fair return by the railroads of the coimtry
as a whole should be earned; (2) it will clear up a great many
misapprehensions and misunderstandings on the part of the public
as to the fair value of railroad property compared with capitaliz-
ation; (3) if government ownership ever becomes necessary, such
erties of the carriers at something over $50,000,000, of which the railroads would
spend about $35,000,000 in preparing maps and other data. He has spoken of July,
igig, as the time when the valuation may be completed. (See Commercial and Finan-
cial Chronicle, vol. 99, pp. 1508-09, and Boston News Bureau, November 4, 1914, p. 6.)
' Speech before Chamber of Commerce of the United States, New York Times
Annalist, February 16, 1914, p. 197.
' Speech of Mr. Prouty, New York Times Annalist, February 16, 1914, p. 197.
STEAM-RAILROAD BONDS 1 83
a valuation will, of course, be a necessary preliminary to purchase
of the railroads by the Government.
In this connection the valuations of railroad property already
made by certain of our States is interesting. We
give here a table (on page 184) showing value com- of railroad
pared with capitalization of railroads in the States of by'certS™^ *
Michigan, Wisconsin, Minnesota, South Dakota, and ^'**^*
Washington.*
This table shows a capitalization in the States of Minnesota
and Washington very much below the estimates for the cost of
reproduction and considerably below the estimates of present
value; in Michigan, Wisconsin, and South Dakota, it shows a
capitalization somewhat above the estimated cost of reproduction
and conaderably above the estimated present value.
We are of the opinion that a valuation of all the railways in the
United States, if made on the basis of allowing for all proper
elements of value, will prove an agreeable surprise to ^^^^ .
security-holders and to the public. There will be un- ation Ukeiy
doubtedly some exceptions in cases where flagrant agreeable^"
and imjustified overcapitalization has taken place. ^"'P"^*
In the early days, of course, as special inducements for raising capi-
tal to build the railways, Kberal nominal issues of bonds and stocks
were made compared with the amoxmt of money received for the
same. The increased value of railroad property, however, together
in many cases with the drastic reorganizations of 1893 to 1898, have
resulted either in bringing up present value or in reducing capital-
ization so that the margin between the two is very much less than
it was once.
In addition to federal supervision and federal valuation of the
railways, there are various reforms that perhaps can be put into
Dractice with great advantage to the holders of rail- „
, ... rrrt i- 11 • ' J. t. i_ Suggested
road securities. The foUowmg pomts have been sug- railroad
gested: (i) That executive officers actually should '^^°™^
represent the great body of stockholders and not bankers or other
parties that might have motives other than the general good of
the railroad; (2) that voting by proxy should be abolished in favor
* These valuations are not always made up on exactly the same basis, but they will
serve as a reasonably fair comparison.
184 AMERICAN AND FOREIGN INVESTMENT BONDS
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steam-railroad" bonds 185
of personal voting or possibly of voting directly by mail; (3) that
railroad directors should direct and should receive adequate com-
pensation for satisfactory service; (4) that at least one represent-
ative of the employees should be given a seat on the board of
directors; (5) that meetings of boards of directors should be open
to stockholders and to the public; (6) that minority stockholders
should have a right, when they disagree with the decisions of
the directors, to ask the courts to compel the corporation to pay
the expenses of an appeal; (7) that railroad ofl&dals should be
compelled to advertise for bids for all purchases ;' (8) that railroad
accounting should be uniform, so that every one can see how any
given property is being managed compared with any other; (9)
that raUroad accoxmting should be so clear as to make impossible
expenditures of money for influencing legislation without the
knowledge of the public. ^
In discussing in this book the lines on which, in our opinion,
exclusive federal regulation of the railways may be
carried out and in discussing possible reforms in rail- lation and
road management, we have in mind not so much the "f*tii?rdf-°
establishment of the railways on a basis to give the resuft1n°bitter
best service to the country, — though from another ^q™" *and1n
point of view this is of paramount importance, — as greater safety
for investors
we have the prevention of the recurrence of the un-
fortunate experiences of investors in railroad securities in the past.
We have discussed many of the general and special causes of
railroad receiverships. We shaU try now to give a brief outline
of the way in which some of our important railroad Railroad re-
reorganizations have worked out both for the rail- organizations
roads and for the old security-holders.
In seven reorganizations between 1880 and 1889, — Atchison
(two). East Tennessee, Erie, Reading (two), and Rock Island, —
according to Mr. Stuart Daggett, the total amoimt of Reorganiza-
bonds was increased from $651,318,271 before reor- ^8^o_gp
ganization to $797,570,454 after reorganization. In and 1893-98
seven reorganizations from 1893 to 1898, — Atchison, Baltimore
* See in this connection section lo of the "Clayton Act," approved October 15,
IQ14; 38 Stat. L., part i, chap. 323, pp. 730, 734.
' See statement of Charles S. Mellen, as reported in the Boston American, May 31,
1914; also Boston News Bureau, June 2, 1914, p. i.
1 86 AMERICAN AND FOREIGN INVESTMENT BONDS
& Ohio, Erie, Northern Pacific, Reading, Southern and Umon
Pacific, — the total amount of bonds was reduced from $924,978,-
070 before reorganization to $882,574,531 after reorganization.'
In the reorganizations before 1893, fixed charges were increased
slightly from $43,276,372 to $43,449,306; whereas in the reor-
ganizations of 1893 to 1898, fixed charges were reduced from
$65,984,219 to $45,576,984, a reduction of over 30 per cent.^ In
the earlier period, rentals increased nearly 10 per cent; whereas
in the later period, rentals decreased nearly 60 per cent.*
The reorganizations of both periods resulted in an increase in
total capitalization. Those before 1893 resulted in a substantial
General sum- increase in bonds, while the items of preferred and
gamzations°in common stock remained practically stationary; the
the two periods reorganizations of 1893 to 1898, on the other hand,
resulted in a considerable decrease in the amount of bonds, a very
large increase in preferred stock, and a substantial increase in
common stock. In other words, the reorganizations before 1893
were effected principally with securities the charge on which was
obligatory, whereas those from 1893 to 1898 were effected to a
large extent with securities the charge on which was optional.*
In the reorganizations both of the earlier and of the later period,
assessments were general. These assessments bore most heavily,
of course, on the junior securities, particularly on the
common stock. This was true to a less degree in the
earlier period of reorganization than in the later.
In general, it may be said that the earlier reorganizations, as
was shown by the subsequent failures of many of the same roads,
EarUer reor- Were much less effective than were the later reorganiz-
fe^sTeffecSve ations. In the earlier period security-holders were
than later ones handled too tenderly, and the necessary reductions in
fixed charges were not made and often the necessary amounts of
new capital not raised. In most of the later reorganizations, fixed
charges were reduced sufficiently and the necessary amounts of
new capital raised.
Perhaps it will be of interest to see how the holders of various
securities fared in some of the reorganizations of 1893 to 1898;
' Daggett, Railroad Reorganisation, p. 363. ' Ibid., p. 337.
» Ihid., p. 370. * Daggett, p. 373.
STEAM-RAILROAD BONDS 1 87
in other words, to find out what the various bondholders and
stockholders received for their old securities and ^i,at gggurity.
what contribution they had to mate toward new holders re-
., , rr,, . , , nr, ccived In lOUT
capital. The accompanying tables on pages 188-191 reorganizations,
show new securities issued in exchange for old secu- '^53-98
rities and assessments in these four reorganizations: Atchison,
Topeka & Santa F6, according to plan dated March 14, 1895;
Union Pacific, according to plan dated October 15, 1895; North-
em Pacific, according to plan published March 16, 1896; Balti-
more & Ohio, according to plan dated June 22, 1898.
It is to be noted that in the Atchison reorganization, there was
a Uberal scahng-down of the principal of the debt by using to a
considerable extent new preferred stock; that in the ^
Summary of
Umon Pacific reorganization, the principal of the old these reor-
bonds was scaled down somewhat, but the chief ^^"^^ '°°*
feature was a reduction in interest for the new bonds as well as
a considerable use of preferred stock; that in the cases of the
Northern Pacific and Baltimore & Ohio, the reorganizations were
effected to a large extent through a reduction in interest for the
new bonds as compared with the old, rather than through a reduc-
tion in principal, and that in both cases preferred stock was used
to a considerable extent.
One thing more needs to be noted about these reorganizations.
In the three cases where the roads were reorganized after sale at
foreclosure, — namely, Atchison, Union Pacific, and Foreclosure
Northern Pacific, — the price obtained in each case ?"■=« ^oes
' ^ not necessanly
at foreclosure sale was very much less than the par bear dose reia-
value of the old debt; for instance, the property and to the value of
franchises of the Atchison, Topeka & Santa F6 Rail- ^^^P^°P^y
road were sold at foreclosure for $60,000,000,^ as against a prin-
cipal of the old debt before reorganization of $233,595,248;'' the
old Union Pacific Railway main line and securities involved pay-
ments of $85,677,224, as against total debt, including debt to the
United States Government, October i, 1895, of $111,070,224;^ the
' Commercial and Financial Chronicle, vol. 61, p. 1063.
' IWd., vol. 60, p. 659.
' Annual Report Conunissioner of Railroads (Washington, 1898), p. 9; Commercial
and Financial Chronicle, vol. 61, p. 705; vol. 65, p. 870. Of the total debt of the Union
Pacific as given, $53,039,512 represented debt to the United States Government.
1 88 AMERICAN AND FOREIGN INVESTMENT BONDS
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STEAM-RAILROAD BONDS
191
I
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00
f^ i ^
O 3 I
E 2-1
■■a
a
a
i
§
888
4ft « «
mi\
:|§§§l 111 I
tnOOOOioQinC
OOOOOOOOC
MMMHHHHM^i
S I I I 1 I II I
p OtO«0 o »
1 1
iilili
S « S S Ef«
1 6?
1
'*0 Jj
g.lil
0.2.2.S.2 a 3.2 d'e.2 o o ^2
600003 6o:|q3 8.Suo
■Ml
192 AMERICAN AND FOREIGN INVESTMENT BONDS
Northern Pacific Railroad and lands were bought in for $1 5 ,938, 200/
as against total debt of the company, June 30, 1896, of $132,376,-
500.* The purpose of these figures is to show that the foreclosure
price bears no necessary relation to the debt or to the value of the
property. In all such cases, the bids at foreclosure are made on
the basis of what bid is necessary in order to get the property and be
in a position to dictate the reorganization. Minority bondholders,
however, or those who do not assent to the plan of reorganization,
must take in satisfaction of their old claim a pro rata of the fore-
closure price; that is, if properties are sold for $60,000,000, for
instance, which have bonds outstanding of $120,000,000, the non-
assenting bondholders receive only fifty cents on the dollar less
expenses. On the other hand, if they go into the reorganization,
they get the new securities as arranged for by the plan.
In reorganizations the apportionment of new securities usually
is on the basis of the degree of safety of the old securities, and also
Factors deter- Very largely on the basis of what class of new security-
^rdomSnt^of holders furnish the bulk of the new money necessary
new securities (-q pyj- j-j^g property into Satisfactory condition. In
other words, if interests representing the old common stock fur-
nish most of the new money, the old common stock gets bet-
ter treatment than it otherwise would. Just as the old common
stockholders probably have suffered most through the difficul-
ties of their road, so in a successful reorganization, if they pay
their assessments, they are placed in a position to profit most.'
As has been stated earlier in this chapter, many imderlying
issues of bonds have not been disturbed at all in reorganizations,
Lat«r market ^^'^ hzNe received their interest right along. Even
vaitie of seam- bonds that wcrc disturbed received an assortment
ties received m
certain re- of new securftics, which if held for a reasonable time
organizations attained a market value that satisfied and usually
much more than satisfied the entire claim of the old bondholders.
We give herewith on page 193 a table showing the market value
' Commercial and Financial Chronicle, vol. 63, p. 189, and Daggett, p. 308.
• Interstate Commerce Comimssion, Statistics of Railways (Washington, 1897),
P- 336.
» Very often a large part of the common stock of the new company gets into the
hands of bankers, who hold the stock until the road is at least on its feet. Sometimes
bankers control the reorganized road through a voting trust for a certain period.
STEAM-RAELROAD BONDS
193
in January, 1901, November, 1907, and January, 1912, of new
securities received in exchange for some of the leading classes of
old securities, according to the four reorganization plans we have
MARKET VALUE OF NEW SECURITIES (LESS ASSESSMENTS)
RECEIVED IN REORGANIZATION IN EXCHANGE FOR
EACH $1000 LEADING OLD SECURITIES 1
Old securities
Atchison, Topeka fie Santa FS Railroad.
General mortgage 4% bonds ,
Second mortgage, class A bonds
Second mortgage, class B bonds
Income bon(& of 1889
Capital stock
Union Pacific Railway.
First mortgage 6% bonds
Sinking-fund 8% bonds
Middle Division 6% bonds ,
Denver Extension first mortgage 6% bonds. . .
Kansas Pacific consolidated first mortgage 6%
bonds
Capital stock
Northern Pacific Railroad.
General first mortgage 6% bonds
General second mortgage 6% bonds
General third mortgage 6% bonds
Consolidated mortgage s% bonds
Collateral trust 6% notes
Preferred stock
Common stock
Baltimore 6* Ohio Railroad.
Baltimore & Ohio consolidated mortgage of
1887 S% bonds
Baltimore & Ohio sterling loan of 1872 6%
bonds
Baltimore & Ohio sterling loan of 1874 6%
bonds
Baltimore & Ohio loan of 1885 S% bonds . . . .
Philadelphia Division 4^% bonds
Baltimore & Ohio Terminal bonds of 1894 4J%
Baltimore & Ohio Stock — first preferred . . . .
second preferred . .
conmion
January
4, igoi
$1109.14
938.86
982.18
938.86
431-63
1467.17
1614.44
1467.17
1467.17
1432.71
7SS-88
1413.68
1667.77
1266.45
1004.7s
1217.92
730.00
656-25
1199.39
1127.71
1229.11
"64.33
1224.85
1000.92
1236.75
"9S-2S
786.50
November
1, 1(107
$968.25
909.20
951.20
909.20
720.25
1321-67
1491.25
1321.67
1321.67
1340.84
I053-7S
1271.25
1615.88
I293-9S
1070.55
1141.67
932.50
915-00
1091.27
1026.90
1116.90
1058.85
1082.92
884.17
977-50
1157-50
755-0O
January
5, 1912
$1108.88
1108.36
1159.18
1108.36
1059.13
1467-SO
1675.63
1467.50
1467-SO
1515-75
1688.00
1348.31
1683.52
1323-58
1087.18
1198.7s
989.38
1028.7s
1162.84
1090.33
1197.13
1130.2s
1215.8s
980.00
1225.38
1534-25
1015.50
> The prices for market value are taken from the Commercial and Financial Chrimicle, vol. 73, pp. 34,
35, 36, 38, 3g; vol. 85, pp. 1126, 1128, 1130, IZ31; vol. 9*, PP. SS, S7i S9, 60.
194 AMERICAN AND FOREIGN INVESTMENT BONDS
given. It can be seen from this table tbat old bondholders and
even old stockholders ultimately had a chance to recoup at least
a large part of their losses and sometimes came out much better
than this.
In spite of the difficulties under which our railroads have been
. operated and all the troubles through which they have
American rail- gonc, railway transportation in the United States has
vrith tS'"* been, on the whole, remarkably efficient. The accom-
o urope panying figures for railways in the United States
compared with railways in Great Britain and Ireland, France,
and Germany may be of interest-
AMERICAN AND EUROPEAN RAILWAYS COMPARED
Country
Capitalization
per mile of
line, igi2*
Miles of line
per 10,000
inhabitants,
igizi
Average re-
ceipts per pas-
senger per
mile,igi2t
(.cents)
Average re-
ceipts per ton
per mile,
jgizt
{cents)
United States
563,535
273,360
147,787
"S,4S4
25-93
S13
6.36
S-68
1.987
i-7So§
1.070
.901
• 744
United Kingdom
France (1911)
2.000**
1. 17?
Gennanv
1. 179
* Interstate Commerce Commission, Annual Report on the Statistics of Railways in the United Stales
(Washington, 1914), p. 32; Interstate Commerce Qimmission, Twenty-fifth Annual Report, Railway Re^
ktms; Returns of the Capital, Traffic, Receipts, and Working Expenditures of the Railway Companies of
the United Kingdom for the year zgiz (London, igis), pp. zviiandzx; Sialisitcal Abstract for the Principal
and Other Foreign Countries (London, 1914), pp. 387, sgo.
t Interstate Cx>mmerce Commission, Statistics of Railways in the United States (1914), p. 11; RaUway
Returns of the United Kingdom, p. xvii ; Statistical Abstract for the Principal and Other Foreign Cotmtries
(1914), pp. 13. 387. 390, 407*
t Interstate Commerce Commission, Statistics of Railways in the United States (1914), p. 42; Statistical
Abstract for the Principal and Other Foreign Countries (1914). PP- 387. 390.
I Approximate. See Dunn, Government Ownership of Railways, p. 291.
** Approximate. Includes collection and delivery. Raper, Railway Transportation, p. 242. Dunn, p. 291,
gives the same figure. See also Annual Railway Reports, French Ministry of Public Works, and
Archiv filr Eisenbaknwesen. See also Bureau of Railway Economics, Comparative RaUway Statistics United
States and Foreign Countries (1912), consecutive no. 83 (Washington D.C., I9i5)>
A glance at the figures in the above table shows that the
railways of the United States have by far a smaller capitaliza-
tion per mile of line than the railways of the United Kingdom,
France, or Germany,' They receive, with the possible exception of
the railways in Great Britain,^ a larger average fare per passenger
^ The cost of construction in densely populated Europe is, of course, far
greater.
' Actual average passenger rates not known.
STEAM-RAILROAD BONDS I9S
per mile. This is owing partly to the use of second-class and
third-class service to a great extent in Europe. For freight service,
however, the railways of the United States receive a rate per ton
per mile not much over one third that received by the railways
of Great Britaiu and Ireland and not quite two thirds that re-
ceived by the railways of France and Germany. Furthermore,
wages on the American railways have been substantially higher
than anywhere in Europe.^
In discussing various phases of the railroad situation, we have
strayed, perhaps, somewhat from our special subject
of railroad bonds. We believe, however, that all the discussed above
..J. J 1 1 1 J- i have bearing
questions discussed above have a more or less direct on safety of
and important bearing on the safety of such bonds. '^^°^^ ^°'^^
In general, railroad bonds are dependent for their safety mainly
on the relation of the total debt to the value of the Leading factors
property and on the relation of net earnings to fixed °* ^^^
charges.
The territory served by any given road, the density of the
freight and passenger business, and the future growth of the ter-
ritory, as well as the physical condition and operating
efficiency of the road and its ability to withstand
competition or proper regulation, all are highly important.^
A first-mortgage bond on a first-class road is, as a rule, the best
kind of security obtainable. Such an issue is the Chicago, Burling-
ton & Quincy Railroad (Illinois Division) 3!% and ^^^ j
4% issue, due July i, 1949. These bonds are the strong rail-
obligation of a company which has never defaulted
on principal or interest of any of its obligations, and which has
paid good dividends through a long series of years, including
some of the most serious depressions ever experienced in this coun-
try. The bonds are part of what is now a closed first mortgage
on the valuable terminal property of the company in the city of
Chicago, on practically all the mileage in the State of Illinois,
and on the line running from Chicago to St. Paul, Minnesota.
' Raper, Railway Transportation, p. 190.
' If tiie bonds are sectired on a portion of the road, the question always should be
considered as to whether this piece of road could be operated successfully as an inde-
pendent property.
196 AMERICAN AND FOREIGN INVESTMENT BONDS
They are followed by $64,247,000 general mortgage 4% bonds
and by $215,227,000 "joint" bonds issued against the stock of
the company. Other especially strong mortgage issues are New
York Central & Hudson River Railroad 3^%, 1997; Pennsylvania
Railroad 4%, 1943 and 1948, and 4|%, i960; Lake Shore & Michi-
gan Southern Railway 3!%, 1997; Chicago, Milwaukee & St. Paul
Railway general mortgage 3!%, 4%, 4!%, 1989; Chicago & North-
western Railway general mortgage 4% and 5%, 1987; and Illinois
Central main line 4%, 1951. Many other exceedingly well-secured
issues could be given in a longer hst.
In the matter of the prices of raikoad bonds, we find, in com-
paring the prices of 1902, for instance, with those of 1912, a decline
Prices of ill price or increase in net income similar to what we
railroad bonds jj^ve f oimd in the cases of state and mimicipal bonds.
The accompanying table illustrates this point.
Bands
Prices
igoz"
igiz\
3-90%
3-85
3-43
3- 10
3-25
3.38
3-25
3-8s
3-4S
3-73
4.04%
Baltimore & Ohio, orior lien xk^n. 102 k
4. ^0
Chicago, Builington & Quincy KailroaJd (Illinois Division), 3^%,
4- IS
4- OS
4. 10
Chicago, Milwaukee & St. Paul Railway, general 4%, 1989
Chicago & Northwestern Railway, genend 3^%, 1987
Tllinnis CjPT\tr:\\ RailroaH, first mortgage, 4% TQ5r
3-90
4.00
New York Central & Hudson River Railroad, 3!%, 1997
Northern Padfic Railroad, prior lien 4%, 1997
3-8S
3-95
Union Pacific Railroad land grant 4%, 1947
* Prices January 3, 1902. See Quotation Supplement, Commercial and Financial Chronidet Februaiy
8, zgo2, pp. 23, 24, 27, 28, 30; Commercial and Financial Chronicle, vol. 74, pp. 33-36.
t Prices Januaiy 5, 1913. See Commercial and Financial Chronicle, January 6. 1912, vol. 94, pp. 55-60.
The lowest average prices of railroad bonds recorded during the
past fifteen years occurred in the fall of 1907 and in the summer
and early autumn of 1915. As showing the effect of the war, the
average price of twelve issues of railroad bonds listed on the New
York Stock Exchange showed a net decline between July, 1914,
and July, 19x5, from 90.9 to 87.7, or 3.2 points.'
In closing this chapter on railroad bonds, we will say that the
' Babson's Desk Sheet of Tables and Charts, July 29, 1915.
STEAM-RAILROAD BONDS 197
railroad industry in the United States is substantially equal in
magnitude to all the manufacturing industries and is
exceeded to any extent only by farming. ' The mileage of railroad
is over one third the total mileage of the world. The '° "^"^
industry has, as stated earlier in this chapter, over 1,800,000
employees," which, on the usual basis of figuring five in a family,
involves the well-being of about 9,000,000 people. According to>
the figures of the Interstate Commerce Commission for the year
ending June 30, 1913, the net capitalization of all the railroads in.
the United States is $15,330,131,446, and the gross capitalization
$19,796,125,712."
On the whole, the service which the American railroads have
given to the country has been not only efl&cient, but absolutely
necessary for the development and even the existence ^ _, ,
•' '^ ... Importance of
of the United States as one country. This service has service per-
established free communication and made possible the American
free interchange of commodities over a vast territory, "^^ '°^^
and has brought into being thickly populated communities which
otherwise probably never would have come into existence. Fur-
thermore, the railroads have performed this immense service on
the basis of an exceedingly moderate capitalization compared with
capitalization in other important civilized countries. They have,
paid higher wages to their employees and have given freight ser-
vice at very much lower figures per ton per mile tiian Railroads
the railroad systems of Europe. |^,ft^ ^«dlrai
This great industry certainly is entitled to receive ^^4"g„ti°igj "J;
rates which will make possible efficient service in the rates which
present and future growth to correspond with the good service
growth of the country. It should be subject, in our retum^t"
opinion, to federal regulation in such a way as to '°vestors
safeguard the interests of the public and of investors. In the
broadest sense, the general prosperity of the coimtry and of the
railroad industry are essential to the safety of railroad bonds.
1 See Bureau of Railway Economics, Bulletin no. 39, Comparison of Capital Values
— Agriculture, Manufactures, and the Railways (Washington, 1912), p. 14.
' Interstate Commerce Commission, Twenty-sixth Annual Report, Statistics of
Railways in the United States (Washington, I9i4)> P- 23-
» IMd., pp. 28 and 30.
CHAPTER VI
PUBLIC-SERVICE CORPORATION BONDS
If we exclude steam-railroad bonds, which we have discussed in
prindpai the previous chapter, public-service corporation bonds
uc?sem°ce^ror- ^^y be issued by the following principal classes of
poration bonds corporations : —
(i) Electric railways.
(2) Gas companies.
(3) Electric light and power companies.
(4) Telephone companies.*
We will use the term "public-service corporation bonds" in the
rest of this chapter as referring only to the above classes of bonds.
The above classes may be subdivided; for instance, there are
city street railways and interurban railways; there are gas com-
panies which do principally a lighting business and
Public-service ^ . , . , ^ . , . . 7, - ,
corporations compames which furmsh gas prmapally for heatmg
miTkind™^' or cooking; there are electric light and power com-
usiness panies which develop their power principally from
steam and others which develop their power principally from
water power; and there are electric light and power companies
whose principal business is that of furnishing light and others
whose principal business is furnishing power to industries. There
are often, moreover, corporations which do both a street-railway
and an electric light and power business, or a gas business and an
Prices of some electric light and power business, or all three com-
leading public- Vn'npfl 2
service corpo- uiiicu..
ration bonds ^^g gjyg ^gio'vp prices on an incomc basis of certain
' Years ago there were a good many private water companies serving local com-
munities, but most of these have since been taken over by municipalities for municipal
ownership and operation.
* Of recent years, there has been a large development of the holding company as a
vehicle for controlling public-service corporations, often of various kinds and some-
times located in different States. (See The North American Company, Public Service
Corporation of New Jersey, The United Gas Improvement Company.)
PUBLIC-SERVICE CORPORATION BONDS ig9
well-known public-service corporation bonds in April to July,
1914:1
Ladede Gas Light (St. Louis) first-mortgage 5% 1919. .4.66%
New York Telephone 4!% 1939 4.68%
Detroit Edison first-mortgage 5% 1933 4-77%
Cleveland Railway 5% 1931 4-83%
Commonwealth Edison (Chicago) 5% 1943 4.86%
Seattle Electric 5% 1930 4.87%
Union Electric Light and Power (St. Louis) 5% 1932 . . .4.88%
Southern Power 5% 1930 4-95%
Boston Elevated Railway 5% 1942 S-oo%
American Telephone & Telegraph 4% 1929 S-oo%
Interborough Rapid Transit (New York) 5% 1966 .... 5.08%
These are fairly representative of the best grade of public-
service corporation bonds.
A brief sketch of the origin and development of the business
now done by public-service corporations may be of interest. The
earliest developments in this field were in gas-lighting, origin and
In 1792, one WilHam Murdock Ughted with gas his pubUc-Se°'
house and ofl&ce in Cornwall, England. In 1813, gas business— gas
was used to light Westminster Bridge; and in 1816, it became
common ia London. The first city in the United States to install a
system of gas-lighting was Baltimore, in 1817. Since that time the
growth of the gas business has been uninterrupted.^ We give on
page 200 a table showing quantity of gas made, capital, and num-
ber of employees for the gas business in the United States at periods
from 1859 to 1909 inclusive. These figures show a steady growth
of the gas business in the United States.
The first street railway in the United States was built in New
York City on Fourth Avenue from Prince Street to Harlem in
1832. Between that date and 1873, horse railroads street and
were introduced into all the large American cities, ekctnc raUways
After 1 88 1, electrical construction and operation was used to a
' Prices from dealers' offerings April to July, 1914, and from the Boston, New York,
and Chicago Stock Exchanges as reported m the Commercial and Financial Chronicle,
July 4, 1914, pp. 32-39-
2 For above material see Encyclopedia Britannica (11th ed., Cambridge, England,
1910), vol. XI, p. 483; Chambers's Encyclopeedia (London, Edinburgh, and Philadel-
phia, 1893), vol. 5, p. 103; Encyclopedia Americana (New York, 1904-05), vol. 7,
"Gas Illumination, History of."
200 AMERICAN AND FOREIGN INVESTMENT BONDS
GAS COMPANIES*
Date
Quantity of gas made
(cubic feet)
Capital
Number of em-
ployees
lien
36,519,512,000
67,093,553,000
"2,549,979,000
150,835,793,000
$28,848,726
71,773,694
258,771,795
567,000,506
725,035,204
915,536,762
5,730
8,723
12,996
28,363 :
39,972
10.7^0 '.
\
i860
\
1880
\
iSgg
\
1004.
IQOQ
I
Thirteenth Census, vol. X, p. 637,
Average number of wage-earners only.
Salaried employees and average number of wage-earners.
considerable extent, and at the close of 1888 there were nearly
one hundred and fifty miles of electric line in operation.^ The fol-
lowing table shows the miles of line operated, cost of construc-
tion and equipment, and number of employees for street and
electric railways in the United States at periods from 1890 to 191 2
inclusive. This table shows a rapid growth imtil 1907 and a mod-
erate growth after that date.
STREET AND ELECTRIC RAILWAYS*
Date
Miles of line
operated
Cost of construction
and equipment
Number of
employees
i8oo
5,783
16,645
25,547
30,437
$389,357,289
2,167,634,077
3,637,668,708
4,596,563,292
70,764
140,769
221,429
282,461
1007
* Department of Commerce, Bureau of the Census, Bulletin 124, CaOral Blectrk LigU and Pimer
Stations and Street and Electric Railways, 1912 (Washington, 1914), p. 64.
The first really successful electric arc lamp was patented in
1857; and in 1858, a lamp designed by Duboscq was used to show
Electric Ught electric light at sea from the South Foreland Light-
and power jjouse m England. From 1878 to 1879, electric arc
lamps were used widely for lighting large rooms, streets, and spaces
' Encyclopedia Americana, vol. 14,
Encyclopedia, vol. 4, p. 285.
'Street Railway Construction"; Chambers's
PUBLIC-SERVICE CORPORATION BONDS
201
out of doors. In 1879, Edison invented the first successful incan-
descent lamp; and from that time the growth of the incandescent
electric-lighting industry has been rapid.'' The accompanying table
shows total horse power, cost of construction and equipment, and
number of employees for central electric stations in 1902, 1907, and
1912, and the same data for hydro-electric stations and for central
electric stations and hydro-electric stations combined in 191 2.
ELECTRIC LIGHT AND POWER
Date
Total horse power
Cost of construction
and equipment
Number of employees
Central dectric sta-
tions*
1,845,048
4,098,188
7,528,648!
3,179,244
10,707,892
$504,740,352
$1,096,913,622
$2,175,678,266!
5922,954,341
$3,098,632,607
30,326
1007
47,632
1012
70,^^'?
Hydro-electric sta-
tions^ {Reporting
water - power of
1000 horse power
or more)
17,160
Total central dectric
stations and hydro-
electric stations
9649s
• Bureau of the Census, Bulletin 124, Central Electric Light and Power Statiorvs, etc., pp. 14 and 15.
t Ibid.i p. 21.
These tables show the importance and rapid growth of the
electric industry.
Professor Alexander Graham Bell, on February 14, 1876, filed
in the Patent Ofl&ce specifications and drawings of the original
Bell telephone. The first important test of the new ^ , ,
. . • 3 r\ I. Telephones
invention was m a conversation earned on, October
9, 1876, by Professor Bell and Thomas A. Watson over a tele-
graph Une between Boston, Massachusetts, and Cambridge,
Massachusetts." The table on page 202 shows number of stations
' Chambers's Encyclopedia, vol. 4, pp. 281-82; Encyclopedia Americana, vol. 6,
"Electric Lighting."
' Chambers's Encyclopcedia, vol. 10, p. no; Herbert N. Casson, The History of the
Telephone (Chicago, 1910), p. 49 and plate.
202 AMERICAN AND FOREIGN INVESTMENT BONDS
TELEPHONE BUSINESS*
Dale
Number of stations
or telephones
Total capitalization
outstanding
Number of
employees
1880
54,319
233,678
2,315,297
4,906,693
7,326,748
$14,605,787!
72,341,736
348,031,058
758,122,214
991,294,115
3,338
1890
8,645
1002
78,752
131,670
IQ12
183,361
Points of
similarity in
different classes
* Department of Commerce and Labor, Bureau of the Census, Telephones, igii (Washington, igis),
P- 13-
t Partial figures.
or telephones, total capitalization outstanding, and number of
employees for the telephone business at periods from 1880 to 1912
inclusive. These figures show a growth almost unbeHevable. It is
now possible to talk over the telephone from New York City to
San Francisco.
The business of public-service corporations, with the possible
exception of that of interurban railways and of that
portion of the electric light and power business which
may be called industrial power business, is similar in
three leading respects: —
(i) In being based on a franchise or privilege of some sort.
(2) In being, as a rule, monopolistic.
(3) In being affected to a comparatively slight extent as to earn-
ings by general businesss expansion or depression.
Some of these conditions are inherent in the nature of public-
service business and some are the result of comparatively recent
developments.
In attempting to judge the safety of any given issue of public-
service corporation bonds, one of the first considerations is the size
and character of the community served. The cities
in the United States having a population of 100,000
or over naturally furnish the best field, other things
being equal, for the development of street-railway or
retail gas and electric business. In the same way,
those of our States having a large population, like Massachusetts,
New York, Ohio, and Illinois, furnish the best field for the great
Size and char-
acter of the
community
served an
important fac-
tor in safety
PUBLIC-SERVICE CORPORATION BONDS 203
Bell telephone concerns. The character of the population, the ex-
tent and diversity of their interests, and their attitude toward
public-service corporations, also are important.
Another leading consideration governing the safety of public-
service corporation bonds, and perhaps the most important con-
sideration of all, as in the case of steam railroads, is „ . , ^ ^
., , ^. , , , , , -, , , Ratio of debt
tne relation 01 debt to property or assets. In Massa- to assets is
chusetts, the ratio of debt to property on gas and ™p°''^'
electric light companies is not over fifty per cent,^ that is, for every
issue of bonds there must be paid ia at least an equal amoimt of
capital stock including premiums." Street railways iu Massachu-
setts have the right to issue bonds to an amotmt twenty per cent in
excess of the amoxmt of paid-in capital stock.' Outside of Massa-
chusetts, it is more common to find public-service corporations
having a debt from seventy-five to ninety per cent of the property
or asset value.
Many considerations may modify the safety or lack of safety of
a debt representing a large proportion of the property value; for
instance, control of the business in a valuable terri- _, ^
... , Factors modi-
tory on the basis of givmg good service at low rates, Wng impor-
large net earniug capacity, diversification of business, between debt
strong franchise situation, or particularly efl&cient ^" property
management.
As stated above, almost all public-service corporations, using
the term as we have defined it in this chapter, are monopolistic in
their character. There is, as a rule, only one street
railway, one gas company, or one electric light and senSre'cor-'^
power company in a given city or community. In to^f^°havea
earlier days, when such enterprises were in their in- f?°?°g°|? '°
fancy and when the relation of street railways, gas
companies, and electric light and power companies to the public
had hardly been thought out, even in its broadest lines, there
were often two or more corporations attempting to perform the
same or similar service in one community. This state of affairs
was paid for, as it always is, either by the community in poorer
' In some cases, as in that of the Edison Electric Illuminating Company of Boston,
the debt compared with the property value is so small as to be unimportant.
' Acts 1914, chap. 742, sees. 38-40. • Ibid., chap. 671.
204 AMERICAN AND FOREIGN INVESTMENT BONDS
service or higher prices or else by security-holders in losses on
their investment. Gradually consolidations took place until in
most communities there was only one corporation attempting to
perform the same or similar service.
As soon as it became clear to the public that duplication of
facilities was not only uimecessary, but involved an absolute loss
to the community or to security-holders, States and
of^mfflMpoS' munidpahties, in giving public-service corporations
ied'to^'Stric- ^^ ^E)^^ to do business, imposed conditions of a some-
tions on private ■vfhat different and of a much more stringent character
management . . . , .
than before. For if corporations furmshmg street-
railway service, gas, electric Hght and power, or telephone service
— essential to the every-day life of the community — were to
have a monopoly of the business, they should be compelled to give
satisfactory service at reasonable rates.
Publicly granted rights to operate public utilities usually are
called franchises. All franchises come from the State, although the
legislature may and often does delegate to municipal
Franchises ,,. i-i t^i . -i
authorities the nght to take final action m the pro-
cedure resulting in the creation of a franchise.^ Indiana and Cali-
fornia may be mentioned as examples of States where the power to
grant franchises is exercised indirectly through the act of munici-
palities to which the State has delegated its power.'' Franchises
give public-service corporations the right to operate street-railway
liaes, gas, electric light, or telephone properties, as the case may be,
and the right to use the streets, erect poles and wires, and do other
things necessary to carry on the business of the corporation. Fran-
chises generally have been held to be in the nature of contracts.'
Franchises" in earlier days sometimes contained burdensome
restrictions, such as compelling corporations to pave
restrictions in an imusual distance outside the tracks, place an
unreasonable portion of their wires in imderground
' Skaneateles W. W. Company v. Skaneateles, i6i N.Y. 154, i6Si per Parker,
Ch. J.; S5 N.E. 562; 46 L.R.A. 687; (on appeal) 184 U.S. 354.
' Acts igos (Indiana), p. 383, as amended by Acts igii, p. 181 (Bums's Annot. Ind.
Stats. [1914], vol. 4, sec. 8939); Constitution of California, art. xi, sec. 19.
• Minneapolis v. Minneapolis St. R. Co., 213 U.S. 417; 54 L. Ed. 259; Chicago
Municipal Gas Light, etc., Co. v. Lake, 130 111. 42; 22 N.E. 616. For collection of
authorities, see Public Utilities, by O. L. Fond (Indianapolis, 1913), sec. 95, note. -
PUBLIC-SERVICE CORPORATION BONDS 205
conduits, or charge a rate incompatible with a fair return to secur-
ity-holders.
Many franchises, and until recently most franchises, have been
granted for a definite term of years, ninning usually from twenty
to fifty years. Some franchises have been considered Length of
by the corporations and some held even by the courts fra,iicUses
as perpetual.^
Street-railway franchises and possibly gas and electric light
franchises in Massachusetts " are revocable licenses. Revocable
or simply rights to operate during good behavior. Metendnate
In Wisconsin,' all franchises, and in Indiana,* many pe^^ts
franchises are what may be caUed indeterminate permits.
In most States, a corporation must obtain the consent of the
local authorities to the location of tracks, conduits. Consent of local
poles and wires, and other portions of its plant which fnstamltion of
may interfere with the public use of the streets. property
In the slow improvement of the franchise situation which has
been going on for many years, irregularities and mismanagement
of those in control of public-service corporations, just D^^„jt;e3 c
as in the case of steam railroads, combined with a lack arriving at a
of clear or of any ideas on the part of the public as to franchise
the principles involved, have led to many difficulties ''"^^*'°°
in bringing about even a reasonable working solution of this impor-
tant problem.
In the opinion of the most enlightened public-service corporation
■ See Louisville v. Cumberland Valley Telephone Co., 224 U.S. 649 (holding the
franchise of the Ohio Valley Telephone Company in the city of Louisville to be per-
petual); per Lamar, J., at 664. "The earher cases are reviewed in Detroit St. R.R. v.
Detroit, 64 Fed. Rep. 628, 634, which was dted with approval in Detroit v. Detroit St.
R.R., 184 U.S. 368, 395, this court there saying that 'Where the grant to a corporation
of a franchise to construct and operate its road is not, by its terms, limited and
revocable, the grant is in fee.' "
' As to revocation of street-railway locations, see Acts igo6, chap. 463, part 3, sec.
66; Acts igog, chap. 417, sec. 6; Medford & Charlestown St. R.R. Co. v. Somerville &
Middlesex R.R. Co., in Mass. 232. As to gas and electric light locations, see Boston
Electric Light Co. v. Boston Terminal Co., 184 Mass. 566; Natick Gas Light Co. v.
Natick, 17s Mass. 246-52.
' Laws igoy, chap. 499, as amended; see Wis. Slats, igii, chap. 87, sec. 1797M-74;
Laws zgJ3, chap. 610.
* The Indiana law leaves the acceptance of an indeterminate permit optional with
the utility and fixes a limited period within which to make the change. {Laws of
Indiana, 1913, chap. 76, sec. loi.)
206 AMERICAN AND FOREIGN INVESTMENT BONDS
managers to-day, as well as in the opinion of publicists, the best
Best sort of sort of franchise is one that is fair and reasonable
franchise ^jq^Ii ^q ^j^g community served and to the corporation.
As exceedingly interesting franchise arrangements of a more
or less special character and yet embodying the
franchise principle of fair dealing between the community served
arrangemen ^^^ ^^^ corporation, we wish to caU attention to the
following:
(i) The Boston Sliding Scale Act,^ which established for a ten-year
period from June 30, 1906, the relations in certain respects between
the Boston ConsoUdated Gas Company and the community
served. This act, passed after a valuation of the properties under
the direction of the Massachusetts Gas and Electric Light Com-
missioners, provided for a standard price for gas of ninety cents
per one thousand cubic feet and a standard rate of dividends on
the capital stock of 7% per annum. It provided further, that for
every one-cent reduction in the price of gas below the standard
price, the company might increase its dividend one-fifth of 1%.*
(2) Franchises of the Chicago City Railway Company and the
Chicago Railways Company granted by an ordinance' passed
February 4, 1907, and approved at popular election April 2, 1907.
These franchises fixed valuations for municipal purchase and pro-
vided for a distribution in cash of the surplus earnings on a five-
cent fare basis between the city of Chicago and the companies.
(3) Franchise of the Cleveland Railway Company granted by an
ordinance * passed by the City Coimcil and approved by the
Mayor, December 18, 1909, and ratified by the voters of the city
* Acts ic)o6, chap. 422.
' The Boston Sliding Scale Act has been followed by general legislation embodying
substantially the same principles in the following States: New York, Pennsylvania,
Maryland, Ohio, Wisconsin, Missouri, Idaho, Arizona, and California. New York:
Laws igio, chap. 480, sec. 65(4); Birdseye, etc., Cons. Laws, vol. 8, p. 2200, chap. 48,
sec. 65(4), in efEect June 14, 1910; Pennsylvania: Laws 1(113, no. 854, art. 3, sec. 1(0),
ineflEect January i, 1914; Maryland: Laws igio, chap. 180, sec. 31^, p. 375, in effect
April s, 1910; Ohio: Laws igii, p. 554, House Bill no. 325, sec. iq, in effect June 30,
1911; Wisconsin: Laws, 1907, chap. 499, in effect July 11, 1907; Wisconsin Stats.
(1911), sec. 1797M-17; Missouri: Laws 1913, p. 603, Senate Bill no. i, sec. 68(4),
in effect April 15, 1913; Idaho: Session Laws 1913, chap. 61, sec. 20, in effect May 7,
1913; Arizona: Laws ipi2, chap. 90, sec. 21, Rev. Stats. 1913, sec. 2297; California:
Stats, igii. Extra. Session, chap. 14, sees. 20-21, in effect March 23, 1912.
' Council Proceedings (Chicago, 111., 1906-07), pp. 2944-90.
* Ordinance no. 16238A, entitled "An ordinance granting renewal of the street-
railway grants of the Cleveland Railway Company," as amended by Ordinance no.
20890B, passed July 10, 1911.
PUBLIC-SERVICE CORPORATION BONDS 207
at a referendum election, February 17, 1910. This franchise,
granted after a valuation of the company's property made by a
court, provided for municipal purchase under certain conditions
and for a fare which would take care of operating expenses and
maintenance, interest on the debt, and 6% on the valuation as
represented by the capital stock.
(4) Agreement^ between the City of New York and the Interborough
Rapid Transit Company for building the new subways. This
agreement provided that the new subways should be owned by
the City of New York, and operated by the company, that part of
the cost of construction should be paid by the city and part by
the Interborough Rapid Transit Company; and that the company
should have a first claim on the earnings to an amount sufficient to
insure a satisfactory return on its investment.
All these franchise arrangements show an adaptation of sound
general principles to peculiar local conditions.^
The franchises granted in Chicago and in Cleveland were the
result of independent negotiations between the cities and the com-
panies. They were made effective before even the interborough
existence of any public-service commissions having Rapid Transit
•' '^ ° agreement
jurisdiction. The Interborough Rapid Transit agree- made effective
ment, on the other hand, while the result of nego- PubUc-Service
tiations between the City of New York and the Commission
company, was made effective only through the approval of the
Public-Service Commission, First District, State of New York.
These facts suggest how recent is the idea of control of local public-
service corporations by state commissions.
To-day, however, not only the franchise question in its narrow-
est sense, but the whole question of the relation of public-service
corporations to the communities which they serve centers around
regulation by state commissions. This is of the greatest impor-
' City of New York, by the Public-Service Commission, First District, with Inter-
borough Rapid Transit Company, Contract no. 3, dated March ig, 1913; the City of
New York, by the Public-Service Commission, First District, with Interborough
Rapid Transit Company, lessee and grantee, supplementary agreement dated March
ig, igi3; Public-Service Commission, First District, to Interborough Rapid Transit
Company, certificate dated March 19, 1913; Public-Service Commission, First Dis-
trict, with Manhattan Railway Company, certificate dated March 19, 1913.
' For an interesting, but not, as it seems to us, entirely soimd, franchise settlement,
see new franchise ordinance of the Kansas City Railway & Light Company. This pro-
vides among other things that the city shall have five representatives on the Boaid of
Directors. (Commercial and Financial Chronicle, vol. 99, p. 196.)
208 AMERICAN AND FOREIGN INVESTMENT BONDS
tance to investors. The regulation of public-service corporations
Relation of ^y State commissions affects the safety of public-
pubUc service scrvice Corporation bonds fundamentally. While this
corporations to ^ . , . , .
communities regulation may not always be exercised wisely, it
centers around Substitutes for the more or less capricious action of
state rom-''^ private bankers in investigation and supervision the
missions actiou of State commissions raised above private and
local considerations. For this reason, together with the fact that
the subject is comparatively new, we will discuss state regulation
of public utilities at considerable length.
Among the earliest commissions approaching at aU the character
of the modem state public-service commissions were the New
Early com- Hampshire Board of Railroad Commissioners estab-
missions j^gj^g^ ^ 1844,1 the Massachusetts Board of Raihoad
Cormnissioners estabhshed in 1869,^ and the Massachusetts Gas
Commission established in 1885.' Some of the early commissions,
such as the Massachusetts Board of Railroad Commissioners, had
no power to enforce their recommendations, except the power of
pubhc opinion; whereas, others, like the Massachusetts Gas Com-
mission, could, after a hearing, order changes in the quality and
price of service and decide appeals as to the entrance of new com-
panies into a field already served. Most of the early commissions
had Jurisdiction over steam railroads only.
The estabhshment on a large scale of modem public-service
commissions having jurisdiction usually over all public utilities
,, , , ,. dates from 1007. New York State by an act approved
Modem public- • j ■,,•-, ■, , ,• • •
service com- Jimc 0, 1907,* cstabushed two public-service commis-
""^^^ sions; one for the coimties of New York, Kings,
Queens, and Richmond, and the other for the rest of the State.
Wisconsin, by an act approved July 9, 1907,^ gave to the Railroad
Commission fuU jurisdiction over all pubhc utiUties. To-day
every State in the Union, except Delaware, Wyoming, and Utah,
has state raihoad or public-service commissions of one kind or
another; and Massachusetts, New York, and South Carolina have
each two distinct commissions.
1 Laws 1842-47, chap. 128. ' Acts i860, chap. 408.
• Acts z88$, chap. 314, p. 769. * Laws 1907, chap. 429.
* Laws igoj, chap. 499.
PUBLIC-SERVICE CORPORATION BONDS 209
We give herewith on pages 210-12 a list of present state com-
missions, with the date of their establishment, which present state
have jurisdiction over street-railway, gas, electric hl'X'^^uri'i
light and power, or telephone properties. This list of diction over
, ,. . . . 1 , 1 street-railway,
pubuc-service commissions shows how recent has gas, electric
been the establishment on any wide scale of state of teitpho^nr''
commissions for the regulation of local pubKc utili- §^"T"''^*''
ties. establishment
The leading principles of regulation followed by these commis-
sions with many variations as to details are as follows: —
(i) To control competition in the interests of the j^^^. ^ _
public served and of security-holders. dpies of state
(2) To insist on adequate and satisfactory ser- pubUc-service
yj[(,g_ corporations
(3) To maintain rates that are just and reasonable as based on
the value and cost of the service including a fair return on a fair
value of the property devoted to public use.
(4) To supervise the issue of securities and the keeping of
accoimts.
Around these general principles has been built the modem elab-
orate and comphcated system of state regulation of public utilities.
Owing to the great number of state commissions and to the fact
that most of these have been established, as stated above, only
recently, the working-out of these principles of public p^^^^ ^,
regulation can be seen best perhaps by discussing the sources of
state laws and some of the most recent leading deci- in discussing
sions and reports of the Board of Gas and Electric '^^'^ «e"iation
Light Commissioners in Massachusetts; of the two Public-Service
Commissions in New York State; of the Wisconsin Railroad Com-
mission; and of the California Railroad Commission, together
with a few decisions of special interest from other States.
The question of the control of competition has j^^^^ .^.^^
come, in most cases, to mean the recognition of mo- of monopoly
nopoly.' Recognition of monopoly is often a ques- certificates
tion of granting rights to operate. In a great many convenience
States, nowadays, including Massachusetts, New ^J^"! necessity
* This does not, of course, predude competition from sources not under public con-
trol or only partially under public control — as witness the "jitneys."
2IO AMERICAN AND FOREIGN INVESTMENT BONDS
PRESENT STATE COMMISSIONS HAVING JURISDICTION OVER
ELECTRIC RAILWAY, GAS, ELECTRIC LIGHT AND POWER,
AND TELEPHONE COMPANIES
SUUe
Name of commission
Date of laws establishing
Jurisdiction •
Alabama!
Railroad Commission
Approved April 23^ 1907
"Electnc railwaj^ and tele-
of Alabama
phone companies
All public-service corpiora-
Arizona*
Arizona Corporation
Approved May 28, 1912
Commission
tions
California "
Railroad Commission
Constitutional amendment
All public-service corpora-
of California
adopted October 10, 1911;
tions — subject to the right
act approved December
of municipalities to retain.
33 » 191 1
relinquish, and resume
their present rights over
local utilities
Colorado *
Public Utilities Com-
Approved April 12, 1913
All public-service corpora-
mission
tions
Connecticut '
Public Utilities Com-
Approved July 11, 1911
All public-service corpora-
mission
tions
Florida »
Railroad Commission-
ers for the State of
Florida
Approved May 26, 191Z
Telephone companies
Georgia »
Raihoad Commission
Approved August 23. 1907
All public-service corpora-
of Georgia
tions
Idaho 8
Public Utilities Com-
Approved March 13, 1913
All public-service corpora-
mission of the State
tions
of Idaho
Tllirois ■
State Public Utilities
Approved June 30, 1913
All public-service corpora-
Commission
tions
Indiana*"
Public Service Com-
Approved March 4, 1913
All public-service corpora-
mission of Indiana
tions
Kansas"
Public Utilities Com-
Approved March 14, 1911
All^ public-service corpora-
mission for the State
tions except those owned
of Kansas
by mimicipalities
Kentucky "
Railroad Commission
Approved March 15, 1912,
Telephone companies —
and March 19, 1912
limited jimsdiction
Louisiana *'
Railroad Commission
Constitution in effect
Telephone companies
of Louisiana
May 12, 1898
Maine "
Public Utilities Com-
Approved March 27, 1913
All^ public-service corpora-
mission
tions
Maryland «
Public Service Com-
Approved April s, 1910
All pubUc-service corpora-
mission
tions
* Tliis statement is intended to indicate the scope of the jurisdiction of the various state commisaons
only in so far as it affects those public -service corporations here in question, namely, electric railway,
gas, dectric light, power, and telephone companies. In addition, most of the state commissions have
jurisdiction over steam railroads, and many have jurisdiction over municipal plants, and over private
water companies, telegraph companies, express companies, irrigation companies, pipe-lines, and other
miscellaneous public-service enterprises not dealt with in this chapter.
> Alabama Code Civil C1907), chap. 130, sees. 5632, 5633, 5637, s647-40» and, in general, sees. 5632-
5725.
* Laws IQ12, chap. 90; Rev. Stats, of Arizona (1913), sees. 2277-2360.
* Constitution of California (1879, as amended), art. xn, sees. 10-24; l-aws igii (First Extraordinary
Session), chaps. 14-40J see Henning's General iawjo/Ca/i/i?f«w Ci9i4)»chap. 430,p. iS33;5toto. i87S-76t
p. 783.
4 Laws igi3, chap. r27. See also Session Laws 1883, p. 307.
* Public Acts ipiif chap. 128.
" Laws 1911, chap. 6186, no. 67, and Laws 1911, chap. 6187, no. 68, superseded by Laws iQiSt chap.
6525, no. 105.
' Laws IQ07, no. 223, p. i^-^Codty igii, sees. 2615-70.
8 Session Laws 1913, diap. 61; approved March 13, 1913, in effect May 7, 1913.
" Laws IQ13, p. 459.
10 Acts 1Q13, chap. 76; approved March 4, 1913, in effect May i, 1913.
" Laws iQii, chap. 238; approved March 14, 1911; in effect May 22, 1911.
" Acts 1912, chap. 99; approved March is, 1912; Acts 1912, <Jiap. 143; approved March 19, 1912.
i> Constitution, arts. 283-289; in effect May 12, 1898. (Wolff's Constitution and Revised LawSt vol. i,
p. 1994.) Additional powers. Acts 1908, no. 199.
" Laws 1913, chap. 129; in effect, October 31. 1914.
^ Laws igiOt chap. 180; amended by Laws igi2, chap. 563.
PUBLIC-SERVICE CORPORATION BONDS 2X1
JURISDICTION OF STATE COMMISSIONS (continue^
State
Name of commission
Date of lavs establishing
Jurisdiction
Massadiusetts ^o
Micbigan ^f
Mississippi ^
Missouri "
Montana 30
Nebraska"
Nevada 28
New Hampshire *3
New Jersey =*
New Mexico ^^
New York "
North Carolina »'
North Dakota as
OhioM
Board of Gas and Elec-
tric Light Commis-
sioners
Public Service Com-
mission
Michigan Railroad
Commission
Railroad Commission
Public Service Com-
mission of the State
of Missouri
Public Service Com-
mission of Montana
Nebraska State Rail-
way Commission
State Railroad Com-
mission "Public
Service Commis-
sion"
Public Service Com-
mission
Board of Public Utility
Commissioners
State Corporation
Commission
Public Service Com-
missions
First District
Second District
Cor^ration Com-
mission
Board of Railroad
Commissioners
Public Utilities Com-
mission of Ohio
Approved July 3, 19x4
Qune II, i88s)
In efiEect June 13, 1913
(June IS, 1869)
Approved Jime 2, 1909
Approved November 1,1892
Approved March 17, 1908
Approved March 17, 1913
Approved March 4, 1913
Constitution amended No-
vember 26, 1006; act ap-
proved March 27, 1907
Approved March s, 1907,
and March 23, 1911
In effect May 15, 1911
Approved April 21, ign
Constitution adopted
November 21, 1910
Approved June 12, 1907
Approved March 6, 1899:
March 14, 1901 ; March
II, 1907; March 11, 1913
Approved March 8, 1897,
and March 3, 1911
Approved May s, 1913
(May 31. 1911)
Gas and electric companies
Street railways^ and tele-
phone companies
Electric power and telephone
companies, interurban
electric railways
Telephone companies and
electric railways
All public-service corpora-
tions
All public-service corpora-
tions
Street railways^ and tele-
phone companies
Electric railways and tele-
phone companies, gas,
electric light and power
companies
All_ public-service corpora-
tions
All public-service corpora-
tions
Electric railways, power, and
telephone companies
All public -service corpora-
tions
Counties of New York,
Kings, Queens, and Rich-
mond
Balance of State
Street railways and tele-
phone companies, gas,
electric ^ light and power
companies — except those
owned by municipalities
Telephone companies
All public-service corpora-
tions
!• Acts 1885, chap. 314, and acts in amendment thereof. For present law see act approved July 3, 1914;
Acts I0I4, chap. 742; Acts i86g, chap. 408. Present board established by act in effect June 13, 1913; Acts
jgzst chap. 784-
" PubUc Acts igoQ,iio. 300, approved June 2, i909,)ineffectSeptember 1,1909, succeeding former Rail-
road Commiission. See also Pvbhc Acts, igii, no. 138, as amended hy Public Acts 1013, no. 206. Public
Acts IQOQ, no. 106.
u Mississippi Code igo6, chap. 139, sees. 4826-^; Laws igo8, chap. 80.
M laws IQ13, p. 556. » Laws 1913, chap. 52.
>i ConsHluHon, art. 5, sec. 19a; Statutes 1007, chap. 90; Revised Statutes, igi3, sees. 6104-55.
^ Statutes IQ07, chap. 44; approved March 5, 1907' See R. L. 1912, sees. 4549~85; StaitUes /p77,chap.
162; R. L. I0I2, sees. 4515-48; R. L. igi2, sec. 45So(2),
28 XflWi ipzj, chap. 164; Public Statutes and Session Laws (Supplement, I9i3)» PP- 33S-6o.
M Laws igii, chap. 195.
*> Constitution, art. xi, sees, 7-11: adopted November 21, 1010. See also Laws 1012, chap. 78.
10 La-ios 1007, chap. 429; approved Jxme 12, 1907; in effect July i, 1907; amended by Lawj igiOj chaps.
480, 673; and by Laws 1913, chaps. 344» 5o4. Sos. 5o6, 597. etc. For the law as amended, see Birdseye,
Cons. Laws (Suppl. 1910-13), pp. 2145-2245. For list 01 all amendments, see Lawj 1013 CExtraordinary
Session), Table of Laws and Codes amended or repealed, p. 72.
*' Pi^Uc Laws 1809, chap. 164: Public Laws igoi, chap. 679; Public Laws 1007, chaps. 469, 966; Pell's
Reoisal of 1^08., sees. 1054 to 1118, as amended by Public Laws 1011, chap. 197; Public Laws 1013 (Extraor-
dinary Session), chap. 63; Public Iaiws 1913^ chap. 127.
" Laws 1807, chap. 115. Compiled Laws igiSt sees. 4708-83; also ibid., sees. S79~6oi. See also Laws
zgiz, chap. 241.
>B House Bill no. 582; approved May 5, 1913 (Laws 1913, p. 804). superseding Public Service Commis-
sion established by House Bill no. 325; approved May 31, igzi; in effect June 30, igiz {Laws igzi.
p. 549)-
212 AMERICAN AND FOREIGN INVESTMENT BONDS
JURISDICTION OF STATE COMMISSIONS {continued)
State
Name of commission Date of lava establishing
Jurisdiction
Oklahoma '"
Oregon "
Pennsylvania "
Rhode Island "
South Carolina "
South Dakota »
Tennessee 8^
Vennont "
Virginia '8
Washington »
West Virginia *"
Wisconsin **
Corporation Commis-
sion
Railroad Commission
of Oregon
Public _ Service Com-
mission of the Com-
monwealth of Penn-
sylvania
Public Utilities Com-
mission
Railroad Commission
Public^ Service Com-
mission
Railroad Commission
Railroad Commission
Public Service Com-
mission
State Corporation
Commission
Public Service Com-
mission
Public Service Com
mission
Railroad Commission
of Wisconsin
Constitution adopted 1907;
act approved March 25,
1913
In effect November 2g,
Z912
Approved July 26, 1913
Approved April 17, 1912
Constitution adopted
December 3i> 1S95; act
approved February 25,
1904; act in effect
February 24, 1913
Approved February 23,
zgio
Approved March 10, 1911
Approved April 3, 1913
ApjOTOved January 20, 1909
(December 14, 1906)
Approved April 15, 1903
and March 27. 1914
Approved March 18, 1911
Passed February 21, 1913
Approved July 9, 1907
All public-service corpora-
tions
All public-service corpora-
tions except those owned
by municipalities
All public-service corpora-
tions
All public-service corpora-
tions
Interurban electric railwaj^,
power t, and telephone
companies
Gas and electric companies
except in certain cities
Telephone companies
Telephone comi)anies
All public-service corpora-
tions
All^ public-service corpora-
tions; limited in case of
electric railways
All public-service corpora-
tions
All^ public-service corpora-
tions
All public-service corpora-
tions
80 Constitution of 1Q07, art. K, sees. IS-3S; Session Laws 19x3^ chap. 93.
»i taws iQiif chap. 279. " Laws IQ13, no. 854. ^a l^ws igia, chap. 795.
84 Laws iQiOj no. 286; Laws 19x2, no. 310; Constitution (adopted December 31. i89S)» art. ix, sec. 14;
Laws i8g8, no. 486; Laws 1904, chap. 281; Laws 1913, no. zig. See Civil Code 1912^ sees. 3i3&~64*
85 Session Laws igii, chap. 207.
88 Public Acts IQ13, chap. 32.
8' Laws iQoSj chap. 116; Laws IQ12, no. 166; Laws 1906, no. 126.
88 Acts 1903-03-04, chap. 147. Pollard's Code (1904)* sec. 1313a; see also iWd., sec. I2g4a; Acts 1914,
chap. 340-
w Laws 1911, chap. 117. ** Ads 1913* chap. 9.
«i Laws 1907, chap. 499; approved July 9, J907; published Jxily 11, 1907; Laws 1907, chap. 578; ap-
proved July 12, 1907; published July 13, 1907. See also Laws 1907, chaps. 454 and 614; Laws 1911, chap.
663. For these and other amendments see Wisconsin Statutes (1911), sees. 1795-1797T-12. See also
Laws i$i3, chap. 772. sees. 101-03; chaps. 63, 66, 331, 401, 4S3« 5i8. S23» 603, 621, 681, and 755-
t Jurisdiction over power companies is not clear.
York, Pennsylvania, Ohio, Wisconsin, and California,* these rights
are granted through the issue of certificates of public convenience
and necessity. 2
* Massachusetts: Acts IQ06, chap. 463, part 2, sees. 18, 21, 24, and 71; and part 3,
sec. 7, as amended by Acts igog^ chap. 417, sec. i; Acts 1914, chap. 742, sees. 155-60;
Acts igi4, chap. 787, sees. 9 and 10; see also Acts 1910, chap. 518; Acts igo6j ehap. 463,
part 3, sees. 9 and 44; Acts igiij chap. 442; Acts iQo8f chap. 266; New York: Laws
igio, chap. 480, sees. 53 and 68; chap. 481, sees, g and 10; chap. 673, sec. 3; N,Y. Cons,
LawSy chap. 48, sees. 53, 68, and 99 (i); Pennsylvania: Laws zpij, no. 854, art. 3,
^ It has been remarked with some show of reason that, xinder modem conditions,
public-service corporation franchises exist to enable bankers to sell the bonds.
PUBLIC-SERVICE CORPORATION BONDS 213
Certificates of public convenience and necessity are not issued
unless the commissions are convinced that the granting of addi-
tional facilities is for the public good. The commis- conditions
sions have taken the position that duplication of under which
plants is paid for, in the long run, either by the public of pubUc
in poorer service or higher rates or by security-holders anTnecSy
in losses on their investment. Accordingly, unless the "® '^^"^"^
granting of rights to do a competitive business is absolutely neces-
sary, in the opinion of the commission, in order to obtain good ser-
vice or reasonable rates, such rights are not granted.^ In Indiana ^
and in Wisconsin ' even a municipality cannot compete with an
existing public-service corporation without first obtaining a certifi-
cate of public convenience and necessity.*
Closely coimected with the recognition by commissions of the
sees. 2, 3, and 5; art. 5, sees. 18 and 19; Ohio: Laws ipiz, House Bill, no. 325, sec. 54;
Wisconsin: Laws igi3, chap. 621; chap. 755, sec. 2 (sec. 1596, 62-64),' Laws igoy, chap.
4S4, sec. 1797-39; California: Stats, igii, Extra. Session, p. 18; Henning's General Laws
of California (1914), chap. 430, act 3775, sec. 50. For laws of other States covering
certificates of public convenience and necessity see Arizona: Laws ipi2, chap. 90,
sec. so; Rev. Stats. 1913, Civil Code, sec. 2326; Colorado: Session Laws 1913, chap. 127,
sec. 3s; Connecticut: Public Acts i8gg, chap. 158, sees. 1-4; General Stats. igo2, sees.
3846, 3917, 3920; Idaho: Session Laws igi3, chap. 61, sec. 48; Illinois: act approved
June 30, 1913, sec. ss; Laws igi3, p. 488; Indiana: Acts igi3, chap. 76, sees. 97-98;
Kansas: Laws igii, chap. 238, see. 31; Maine: Rev. Stats., chap. SS, sec. i, as amended
by Laws igi3, chap. 129, sees. 27 and 28, in effect October 31, 1914; Maryland: Laws
igio, chap. 180, sees. 26 and 33; Michigan: Public Acts igi3, no. 206, sec. 9; Missouri:
Senate Bill no. i, approved March 17, 1913, sees. S3, 74, and 96; Laws igi3, p. 556;
New Hampshire: Laws igii, chap. 164, sec. 12 (o) and sec. 13 (a), as amended by
Laws igi3, chap. 145, sec. 13; South Dakota: Session Laws igii, chap. 211; Vermont:
Public Stats. igo6, sec. 4338.
1 Weld II. Gas and Electric Light Comrs., 197 Mass. ss6, 84 N.E. loi; Atty.-General
»; Haverhill Gas Light Co., 215 Mass. 394; Atty.-General ex rel. v. Walworth L. & P.
Co., IS7 Mass. 86, 31 N.E. 482, 16 L.R.A. 398; In re Longaere Electric Light & Power
Co., Public Service Com. Reports, ist Dist. (New York), vol. i, p. 226, affirmed on
appeal in People ex rel. The N.Y. Edison Co. v. Willcox et al., 207 N.Y. 86 (reversing
151 N.Y. App. Div. 832); Calumet Service Co. v. Chilton, 148 Wis. 334, 135 N.W. 131;
State ex rel. Kenosha G. & E. Co. v. Kenosha Electric Ry. Co., 145 Wis. 337, 129 N.W.
600 (confirmation by State Supreme Court of monopoly principle) ; Pacific G. &. E. Co.
V. Great Western Power Co., Opinions and Orders of the Railroad Commission of Cali-
fornia, vol. 1, p. 203; In re Oro Electric Corp'n. Transmission Lines, ibid., p. 253;
In re Application Oro Electric Corp'n, ibid., p. 700.
2 Acts igi3, chap. 76, see. 98.
' Laws igoy, chap. 499, sec. 1797M-74, sees. 3 and 4.
* In Massachusetts, the same result is arrived at by the statute compelling a muni-
cipality, which has voted to establish a municipal plant, to purchase at a fair value the
existing plant of the local public-service corporation. {Acts 1914, chap. 742, sec. 100.)
214 AMERICAN AND FOREIGN INVESTMENT BONDS
monopoly principle is the power to approve consolidations. The
Attitude of general rule is that consolidations are permitted when
towSd con- i^ the judgment of the commissions they will result in
soUdations better service or lower rates.^
In Massachusetts, when two companies are consolidated, the
capital of the new company at the time of consolidation shall not
exceed in amount the smn of the separate capitals of
Basis on which . o t -..x \t i r^/ . .1
consolidations the former compames/ In New York state, the
are penmtte gccond District Commission recently has been per-
mitting the purchase of one company by another at a price in excess
of the original cost of the physical property, provided such excess
is amortized or charged off from earnings during a reasonable period
of years.' In Wisconsin, the purchase of the property of one public-
service corporation by another shall be at a price not in excess of
the value, as determined by the commission.*
„ ., , In view of the general recognition of public-ser-
Possible . ^ 1- ^T. , r
municipal vice Corporations as monopoues, the laws of many
pure ase States, among which may be mentioned Massachu-
setts,^ Illinois,® and Wisconsin,^ provide for possible purchase of
^ For recent cases in consoKdations see Massachusetts: Springfield-Chicopee,
Twenty-eighth Ann. Rep., Board of Gas and Electric Light Comrs. (1912), p. 67; New
Bedford Gas Co. and New Bedford Elec. Co., Fourth Ann. Rep., Board of Gas and
Electric Light Comrs. (1889), p. 73; Worcester Gas Light Co. and Worcester Electric
Light Co., Sixth Ann. Rep., Board of Gas and Electric Light Comrs. (1891), p. 12;
New York: In the Matter of the Joint Application of Rockland Light and Power Co.
and Rockland Electric Co., etc.. Public Service Com., 2d Dist. (New York), no. 176,
decided April 28, 1914. California: In the Matter of the Application of Midland Coun-
ties Public Service Corporation, 3 Cal. R.R. Com. Dec. 598; In the Matter of the
Application of Valley Gas and Fuel Co., etc., 2 Cal. R.R. Com. Dec. 589; In the
Matter of the AppUcation of Livermore Water & Power Co., etc., 2 Cal. R. R. Com.
Dec. 618. See also New York Laws 1910, chap. 480, sec. 54, as amended by Laws
IQ14, chap. 220.
' Acts igi4, chap. 742, sec. 168. In view of the fact that in Massachusetts public-
service corporations cannot have a total capitalization in excess of their physical value,
this is equivalent to saying that companies formed through consolidations cannot have
a capitalization in excess of the physical property.
' See Public-Service Commission, New York, 2d District, Eighth Annual Report
(1914), p. 67, and no. 176, dated April 28, 1914 (Rockland Light and Power case).
* Wisconsin Statutes (1911), chap. 85, sec. 1753-11; Laws igu, chap. 593, sec.
17S3-11, as amended by Laws igii, chap. 664, sec. 133,
' Ads igi4, chap. 742, sees. 92 to 125.
° Laws igi3, p. 455. (Senate Bill no. 538, approved June 26, 1913.)
' Laws igo7, chap. 499, sec. 1797M-79 to 82, as amended by Laws igog, chap. 213,
and by Laws igii, chaps. 13 and 596, and by Laws igi3, chap. z6o.
PUBLIC-SERVICE CORPORATION BONDS 21 5
the property of local public-service corporations by the munici-
palities. In our opinion, this right, whether exercised or not, should
exist in all States.
As soon as the principle of monopoly is recognized, the questions
of rates and service become of prime importance. We „ , .
.,11 ,-1 1 . !• . 1 Regulation
Will take up first the regulation of service as estab- of rates and
lished by statutes and by commission decisions and
reports.
In the past, standards of service often have been prescribed by
direct legislative enactment.' The modem tendency, however, is
to give public-service commissions general authority Regulation
to enforce standards of service. In Massachusetts, <>' service
New York, Wisconsin, and California, as well as in many other
States, the powers so granted to the commissions are fairly com-
plete and comprehensive. The authority of the commissions in
Massachusetts ^ to investigate and change service is especially com-
plete. The Wisconsin ' law goes so far as to make mandatory on
the commission the ascertaining and prescribing, "for each kind
of public utility, suitable and convenient standard commercial
units of product or service." The extent of the authority of state
commissions over service shows a tendency all the time to increase.
In the matter of service there are usually three elements to be
considered: — _, , ,.
Three leading
(1) Safety. elements of
(2) Extent of service.
(3) Character of service.
Any two of these elements, and sometimes all three combined,
are likely to appear in a single case involving the regulation of
service.
On the question of the safety of service, the statutes in a large
majority of the States confer specific authority on the commis-
sions to prescribe such regulations as may insure safety of
safety of operation.* This is true m the four States, ^^'^^
• Standard quality of gas fixed in Connecticut. See Gen. Stats. igo2, sec. 4569, and
in Ohio, General Code igio, sees. 9326-31.
2 Acts igi4, chap. 742, sees. 161, 162, 163; Acts 1913, chap. 784, sees. 23-24.
' Laws igo7, chap. 499, sec. i7g7M-22 to 23.
* See Commission Regidation of Public Utilities, New York (1913), p. 651, and
following.
2l6 AMERICAN AND FOREIGN INVESTMENT BONDS
Massachusetts/ New York,'' Wisconsin,' and California,^ which
we have taken as illustrating many of the principles in this
chapter.
In the matter of the extent of the service, the general rule is that
service shall be as nearly imiversal in extent as is practicable under
Extent of th^ circumstances. Service in excess of the reasonable
service needs of a community and service inadequate to the
reasonable needs of a community, both are discouraged, although
the commissions naturally are inclined to approve service too elab-
orate rather than service at all likely to be considered inadequate.^
Provision is made in many States, including Massachusetts,®
Wisconsin,^ and California,* for joint use of facilities or through
Joint use of scrvice by two or more public-service corporations.
faauties -pjjg California Commission in a recent case ' ordered
physical connection, through routes and joint rates, for telephone
service against the objection of one of the companies.
In the matter of the character of the service, the commissions
either lay down definite imiform standards, £is in Wisconsin, or de-
Character cide the question of service on the merits of each indi-
of service vidual case, as in Massachusetts. To enforce a proper
standard of service, the Massachusetts Conamission, upon com-
plaint, and the Wisconsin Commission upon its own initiative and
as a matter of periodic practice, make, sometimes with the assist-
' Acts igo6, chap. 463, part 3, sec. go, as amended by Acts igi3, chap. 357; chap.
784, sees. 23-24.
* Laws 1 910, chap. 480, sec. 49, 2; see Birdseye, C. & G. Consol. Laws, Suppl. 1910-
13, p. 2180; Laws igio, chap. 480, sec. 66, 2; see Birdseye, C. & G., Consol. Laws,
Suppl. 1910-13, p. 2201.
' Laws igii, chap. 297, sec. 1797-90 and 96; Laws 1907, chap. 454, sec. 1797-57,
as amended by Laws igog, chap. 475, Laws igii, chap. 590, sec. 1797-1216.
* Stats, igii, Extra. Sess., p. 18, as amended by Stats, igis, p. 942. See Henning's
Gen. Laws of California, vol. s (1914), chap. 430, sec. 42, p. 1549.
' See decision of the California Railroad Commission ordering the San Joaquin
Light and Power Corporation to serve certain ranchers, irrespective of whether such
additional consumers will provide a return equal to that from the present patrons,
provided the system as a whole is operated at a profit. (Raoney v. San Joaquin Light
and Power Co., s Cal. R.R. Com. Dec. 587.)
' Acts igii, chap. 487.
' Laws igo7, chap. 499, sec. 1797M-4, as amended by Laws igii, chap. 546.
' Stats, igii, ist Extra. Sess., p. 18, sec. 40-41. Henning's Gen. Laws of California
(19 14), vol. s, chap. 430, p. 1549.
« Tehama County Tel. Co. v. Pacific Tel. & Tel. Co., 2 Cal. R.R. Com. Decisions,
104 (1913).
PUBLIC-SERVICE CORPORATION BONDS 217
ance of the public-service corporations themselves, thorough tests
of the facilities and service furnished.
In all matters of service, the general principle, familiar in rail-
road regulation, is laid down that service shall not be other pnn-
discriminatory as against persons or places. 1 Further- regulation
more, service shall be, as far as possible, free from ȣ service
accidents, uninterrupted and uniform.
Regulation of service should be at once efl&dent and flexible. It
is to be remembered that conditions of service in different places and
at different times vary greatly. "Every State pre- ^^ j^^^^^
sents some peculiar conditions that deserve consider- of service
. . _, 1 • T T should be
ation. A praine state which has no water-power, no efficient and
cheap fuel, which is essentially an agricultural dis- *"
trict, with few, if any, large cities, certainly differs from one with
large urban centers, which abounds in natural resources and which
possesses many large isolated power users." " Furthermore, the
cost of the service, the commercial possibilities, and every other
factor entering into each individual case should be taken into con-
sideration.'
The interrelationship between service and rates is obvious. If
the rates for street-railway, gas, electric Ught and power, or tele-
phone service are too low, the character of the service , , .
, . Interrelation-
is almost sure to suffer. On the other hand, if the ship of service
service prescribed is elaborate and expensive, the
rates charged for such service must be, other things being equal,
correspondingly high.
' Postal Cable Telegraph Co. v. Cumberland T. & T. Co., 177 Fed. Rep. 726;
Hatch V. Consumers' Co., Ltd., 17 Idaho, 204, 104 Pac. 670, 40 L.R.A. (N.S.) 263;
Central Union Telephone Co. v. State ex rel., 118 Ind. 194, 19 N.E. 604; Kjlboum City
V. Southern Wis. Power Co., 149 Wis. 168, 135 N.W. 499; Pond, Ptiblic Utilities
(Indianapolis, 1913), chap, xm, sees. 208 to 229.
* L. H. Harris, Service RegtUations for Electrical Utilities in State Regulation of
Public Utilities (Philadelphia, 1914), p. 286.
' For a few recent cases in commission regulation of service see Massachusetts:
Petition of the Cambridge Board of Trade relative to service of the Boston Elevated
Railway, First Annual Report, Public-Service Commission (1914), p. 133; Petitions
of E. H. Vaughan in re Worcester Consolidated Street Railway, ibid., p. 157; Peti-
tion of Customers v. Natick Gas Light Company, Twenty-eighth Annual Report,
Board of Gas and Electric Light Commissioners, p. 32. New York: In the matter of
Additional Cars on Brooklyn Lmes, 3 P. S. C. R. (ist Dist., N.Y.), 37 and 716. Cali-
fornia: City of San Jos6 v. Pacific Tel. & Tel. Co., 3 Cal. R.R. Com. Dec. 720 (1913).
Wisconsin: Civic League et al. v. Beaver Dam Water Co., 10 W. R. C. R. 661.
2l8 AMERICAN AND FOREIGN INVESTMENT BONDS
In the matter of rates to be charged by public-service corpora-
tions, the following principles prevail: (i) Rates must be reasonable
Principles of both to the customer and to the corporation, and if
pubii?tS^ce" they caimot be reasonable to both, they must be to the
corporations customer — that is, the customer cannot be made to
pay more than a fair value of the service rendered; * (2) there must
be a fair return on the reasonable value of the property at the time
it is being used for the pubUc.^ These principles have been estab-
lished by federal and state laws and confirmed by nimierous de-
cisions of the courts.'
To-day a large number of the States give the public-service com-
missions mandatory power over rates. The right to initiate rates
A *T, -^ r is reserved almost everywhere to the utilities. In a
Autnon^ of i .•
commissions large number of the States, however, the commissions
ov6r r3.tcs ■
are given authority to suspend the operation of rates
fixed by utilities pending an investigation by the commissions as
to their reasonableness.*
Provided the rates charged for service are not in excess of the
value of the service to the consumers, rates for public service are
based on what may be called, in the broadest sense, the
ser^ce,\ost° cost of the service. This cost has been early defined
the broadest ^ Massachusetts ^ as made up of the following three
sense, is the factors: (i) Fair cost, meaning fair manufacturing
cost of the product or service; (2) a fair return on a
reasonable amoimt of capital; (3) such excess as will give the cor-
poration sufficient surplus to meet extraordinary accidents and con-
duct its business with the highest economy. In New York State,^ it
' Brunswick & T. Water Dist. v. Maine Water Co., 99 Maine, 371, 59 Atl. 537
(1904); Covington & Lex. Turnpike Co. v. Sandford, 164 U.S. 578; Spring Valley
Water Works v. San Francisco, 192 Fed. Rep. 137.
" Peckliam, J., in Willcox v. Cons. Gas Co., 212 U.S. 19, at 41.
' See Smjfth v. Ames, 169 U.S. 466, at 546.
* See State Regulation of Public Utilities (Philadelphia, 1914), p. 16. For commission
orders changing rates see Massachusetts: Mayor of Worcester v. Worcester Electric
Light Co., Board of G. & E. Lt. Comrs., Twenty-eighth Annual Report (1912), p. 15;
New York: Fuhrmaiin v. Cataract Power and Conduit Co., 3 P. S. C. (2d Dist., N.Y.),
p. 656 (1913); Wisconsin: City of Milwaukee v. The Milwaukee E. R. & L. Co., 10
W. R. C. R. I (1912); California: City of San Jos6 v. Pacific Tel. & Tel. Co., 3 Cal. R.R.
Com. Dec. 720 (1913).
' See petition of customers of the Springfield Gas Comf)any for reduction in price,
Report, Board of Gas and Electric Light Commissioners (1894), p. 6.
' Laws igio, chap. 480, sec. 97.
PUBLIC-SERVICE CORPORATION BONDS 219
is provided by statute that in making rates due regard must be
given to a reasonable average return upon the value of the property
actually used in the public service and to the necessity of making
reservation out of income for surplus and contingencies. In Wiscon-
sin, 1 the Railroad Commission has laid down the following rule : that
"under normal or ordinary conditions, public utilities are entitled
to earnings that will cover the operating expenses, including de-
predation and a fair return on the investment." The methods of
determining the cost of service as a basis for rates in Massachusetts,
New York, and Wisconsin have been followed, in a general way,
by all the other state commissions.
The factor in the cost of service that has caused the most diffi-
culty and the most discussion is what has been called a fair return
on a reasonable amoimt of capital or on a reasonable ^ .
1 •■ 1 !• r™ • Fair return
value of the property devoted to pubhc use. This on fair value
question involves, (i) what is a fair rate of return; (2) ° ^'°^^ ^
what constitutes a fair value of property devoted to public use.
The rate of return on capital invested in public-service corpora-
tions is governed, in a broad way, by the rate of return on other
forms of investment.^ Obviously, however, the rate
, , •. 1 • . 1 ■ .. 1 Rate of return
of return on capital mvested m corporations under
public protection should be less than the rate of return on capital
invested in competitive or extra-hazardous undertakings. Again,
the rate of return where the business is well managed should be
greater than the rate of return where it is poorly managed. In gen-
eral, the rate of return should be a rate that permits continued
investment in old properties and induces original investment in
new properties.' No hard-and-fast rule can be laid down as to
what constitutes a fair rate of return, but this rate must be deter-
mined in each individual case and after taking into consideration
all the factors which bear on the problem.*
' In re Appl. Manitowoc Gas Co., 3 Wis. R.R. Com. Rep. 163, at 171 (1908).
2 New Memphis Gas Light Co. ti. Memphis, 72 Fed. Rep. 952.
' An interesting suggestion has been brought forward recently called the "variable
rate of return." This plan involves increasing the rate of return in proportion to a
reduction in the average selling price of the product or service and is similar to the
sliding scale arrangement discussed earlier in this chapter. (See Henry I. Lea, The
Fixed Rate of Return on Utilities, reprinted from the Gas Record, Chicago, November
25. 1914-)
* See United States Supreme Court: Willcox v. Consolidated Gas Co., 212 U.S. 19,
29 Sup. Ct. 192; S3 L. ed. 382 (1909), six per cent; New York: (ist Dist. Commission)
220 AMERICAN AND FOREIGN INVESTMENT BONDS
Determination of what is the fair value of the property devoted
to public use leads to the vast and extremely complicated subject
Fair value of of Valuation as a basis for rates. In Massachusetts
property ^j^^ ^ California, among other States, the commis-
sions may make valuations, and in Wisconsin, the commission
must make valuations of the property of any and all public-service
corporations.^
There are to-day two leading theories as to the proper method of
valuation as a basis for rates: (i) The so-called original-cost theory;
Two theories and (2) the theory of cost of reproduction.^ Some
asTbasS™ commissions base their findings almost entirely on
ferrates ^hg original-cost-theory; for example, the St. Louis
Public-Service Commission.^ Other commissions ^ have appeared
at times to accept without reservation the cost-of-reproduction
theory.
The best and most recent authorities, however, are disposed to
Best modem f oUow no ouc theory, but to base their findings as to
practice favors valuation upon all the factors which may enter into the
considenng all . -r ■• »• 1 • 1 c i
elements in de- question. In Massachusetts, owmg to the fact that
vatoe'as a S^is HO public-service Corporation has been able to issue
for rates capital stock except for cash or property, there has
Mayhew v. Kings County Lighting Company, 2 P. S. C. 659 (1911), 7I per cent;
Wisconsin: State Journal Printing Co. v. Madison Gas and Electric Co., 4 W. R. C. R.
SOI, 626-49 (1910); California: Contra Costa Water Co. v. City of Oakland, 159 Cal.
323; 113 Pac. 668 (1911); City of Palo Alto v. Palo Alto Gas Co., 2 Cal. R.R. Com.
Dec. 300 (1913) ; Massachusetts: Haverhill Petitions, Board of Gas and Electric Light
Comrs., Twenty-eighth Annual Report,.p. 41.
' Massachusetts: Acts igis, chap. 784, sec. 14; California: Stats, igii, ist Extra.
Sess., chap. 14, sees. 47 and 70, as amended hy Stats. IQ13, chap. 339; Wisconsin:
Laws 190S, chap. 362; Slats, jgii, sec. 1797-20; Laws 11)07, chap. 499, Stats, igii,
sees. 1797M-S to 1797M-7, 1797M-16, 1797M-42.
^ There is another theory of valuation which has sometimes been called the cost-of-
replacement theory, which considers the cost of replacing to-day, not the same prop-
erty, but property which will perform the same service: there is also a "fair-exchange
value," which is based largely on what the property may be expected to earn. How-
ever useful these theories may be in cases of purchase or condemnation, they are of
very little use, it seems to us, in fixing a basis for rates. See Missouri Rate Cases, 230
U.S. 474, 33 Sup. Ct. 975 (1913); Public-Service Gas Co. v. Board of Public-Utility
Comrs., 84 N.J. Law, 463, 87 Ati. 651 (1913); Fuhrmaim v. Cataract Power and Con-
duit Co., 3 P. S. C. (2d Dist. N.Y.) 656 (1913).
' See Report St. Louis Public-Service Commission, to the Municipal Assembly of
St. Louis, on the Southwestern Tel. & Tel. Co. (October 14, 1913), pp. 9, 12-13.
* See Report, Public-Utilities Commission (Connecticut, 1912), pp. xxvn and
XXXVI.
PUBLIC-SERVICE CORPORATION BONDS 221
not been developed any particular theory or system of valuation.*
In New York State, the Second District Commission in the Buffalo
Gas case * discussed various theories of valuation. After stating
the objections to these theories, Chairman Stevens said: "It is
a question whether any of these theories can be applied alone to
a given case and produce a result of substantial equity and
justice." The Wisconsin Commission in a recent case said: "The
value of a plant and its business that is ultimately found to be fair
and equitable under the circumstances may not agree either with
the original cost or with the cost of reproduction, but in most in-
stances it is likely to be foimd at some figure in the neighbor-
hood of these costs." ' The CaUfomia Commission in certain cases
disallowed reproduction cost where that cost was in excess of the
original cost.*
In another case, the California Commission laid emphasis on the
importance of considering all elements of value.^ In ascertaining
the value of the property of the Stockton Terminal & Eastern
Railroad Company, the California Commission considered the
following matters: (i) Organization, construction, and operation;
(2) stocks and bonds; (3) revenues and expenses; (4) original cost,
as defined; (5) reproduction value, as defined; (6) present value, as
defined. " In the case of new properties, emphasis may be laid, per-
haps, on original cost; in the case of properties built many years
ago, it is more difficult to determine original cost and more natural
to take cost of reproduction as a guide in determining value. To
sum up, the best modem practice favors considering all proper ele-
ments of value as a basis for rates. The origin and development of
the business, the conditions under which the plant was constructed,
the actual investment made, the present value of the plant, and any
other factors having a bearing in any given case should be considered.
On the question of valuation when finally appealed to the United
• See Haverhill Gas Light case, Twenty-eighth Annual Report, Board of Gas and
Electric Light Comrs., pp. 41-60.
' Buffalo Gas Co. v. City of Buffalo, 3 P. S. C. (ad Dist. N.Y.) SS3, at 632 (1913).
' City of Milwaukee v. The Milwaukee Electric Railway & Light Co., 10 W. R. C.
R. I (1912).
• San Jos6 v. The Pacific Tel. & Tel. Co., 3 Cal. R.R. Com., Dec. 720 (1913).
' Re Water Rates and Service in the County of San Diego, 2 Cal. R.R. Com. Dec.
464, at $11-12 (1913).
• 2 Cal. R.R. Com. Dec. 777, 779 (1913).
222 AMERICAN AND FOREIGN INVESTMENT BONDS
States Supreme Court, the court held, in Smyth v. Ames,' that " the
,, . , „ basis of all calculations as to the reasonableness of
United States . ...
Supreme Court rates to be charged by a corporation mamtammg a
a° a basts™ highway tmder legislative sanction must be the fair
for rates yalue of the property being used by it for the conven-
ience of the public. And in order to ascertain that value, the origi-
nal cost of construction, the amount expended in permanent im-
provements, the amount and market value of its bonds and stock,
the present as compared with the original cost of construction, the
probable earning capacity of the property imder particular rates
prescribed by statute, and the sum required to meet operating ex-
penses, are all matters for consideration, and are to be given such
weight as may be Just and right in each case. We do not say that
there may not be other matters to be regarded in estimating the
value of the property." In the Minnesota Rate Cases,^ it held that
"the ascertainment of that value is not controlled by artificial
rules. It is not a matter of formulas, but there must be a reasonable
judgment having its basis in a proper consideration of all relevant
facts." In these latter cases, the court spoke of the cost of reproduc-
tion as an important element in determining value, but it warned
against accepting results which depend on mere conjecture.
All the various details of the valuation question, we will not
Methods of attempt to discuss in this chapter. We will simply
certain™etaiis Consider briefly some of the most important and in-
of valuation tcrestiug phases. Among these may be mentioned: —
(i) Should land be valued on the same basis as other parts of the
property?
(2) In estimating cost of reproduction new of plant, should
present unit prices be taken or average unit prices for a series of
years?
(3) In estimating cost of reproduction new, should present con-
ditions of construction other than the present cost of material and
labor be taken or should there be taken the conditions under which
the plant actually was constructed?
(4) Should depreciation be deducted either from original cost
or cost of reproduction new?
' 169 U.S. 466, at 546.
' Hughes, J., in the Minnesota rate cases, 230 U. S. 352, 434, 33 Sup. Ct. 729 (1913).
PUBLIC-SERVICE CORPORATION BONDS 223
(5) How much should be allowed for overhead charges in con-
struction, for development expense, for going concern value, or for
franchise value ?
The practice of some of the leading commissions in these matters
will further illustrate their attitude toward valuation.
In valuing land for the purpose of fixing rates, commissions gen-
erally use the present value of land."- In New York State, the Com-
mission for the First District has tried to avoid Methods of
making the community pay rates which are higher in ^''""e land
proportion to the growth and increase in activities of the commun-
ity itself. It has treated the estimated average annual increase in
the value of land of the company as income, but in this the commis-
sion has been overruled by the courts.'' In California, in the Tono-
pah & Tide Water Railroad case, the coramission has expressed the
opinion that the basis of return on real property shall be even less
than "the fair average market value of similar land in the vicinity,
including the unearned increment." ' The general rule, however,
is for state commissions to take the present value of land.
In the leading cases on this question taken to the United States
Supreme Court, the theory of the present value of land as a basis
for rates has been held as the proper one. In the „ . , „
-.«•• X, ^ ^ ■, „ 1 1 r United states
Minnesota Rate Cases,* the court allowed a value for Supreme Court
lands equal to the fair average market value of similar °° ^* """^ ^
land in the vicinity, but did not allow for various special costs in-
volved in acquiring the particular land wanted.
On the question of whether in figuring cost of repro- ^^^ practice
duction new, prices at the time of making the valu- ^^^°^^ ^^ °^
' '^ , , ° average prices
ation or average pnces for a senes of years should in estimating
be taken, the best opinion seems to favor the use of duction new
average unit prices for a series of, say, five years.' °* ^'^°'
' In New York (2d Dist.), Fuhrmann v. Cataract Power & Conduit Co., 3 P. S. C.
(2d Dist. N.Y.) 656 (1913). In Wisconsin, Superior Commercial Club v. Superior
Water, Light & Power Co., 11 W. R. C. R. 704 (1912). The United States Supreme
Court has adopted this view. Minnesota Rate Cases; 230 U.S. 352, 33 Sup. Ct. 729
(1913). The St. Louis Commission has abandoned its original-cost theory, when deal-
ing with land. (Report, St. Louis Public Service Commission, to the Municipal Assem-
bly of St. Louis on the Southwestern Tel. & Tel. Co. (October 14, 1913), pp. 9-10.)
* See Kings County Lighting Co. a. Willcox, 156 N.Y. App. Div. 603 (1913).
' 3 Cal. R.R. Com. Dec. 205 (1913). * 230 U.S. 352, 33 Sup. Ct. 729.
6 Petition of Berlin Elec. Light Co. et al., 3 N.H. P. S. C. 174, 196 (1913); City of
Milwaukee ». Milwaukee Elec. Ry. & Light Co., 10 Wis. R. C. R. i, 107, 108.
224 AMERICAN AND FOREIGN INVESTMENT BONDS
The use of present unit costs is likely to be unfair if the date
of valuation happens to be at a time of unusually high or low
prices.^
The question of whether present or actual conditions of con-
struction should be taken as the basis of estimating the cost of
Pavement reproduction new has come up so far principally in
over mains ^j^g f^j^j^j gf whether allowance should be made for
pavement over mains. Where such pavement has not been part of
the actual cost of installing property, the best practice refuses to
allow anything for this item.^
As far as the position of the United States Supreme Court goes,
there are certain statements of the court which seem to indicate an
opinion that allowance should be made for pavement
United states over mains. In Willcox v. Consolidated Gas Com-
Supreme Court , . , . . . , i • i
pany," the question was not, however, squarely raised,
and this decision is hardly to be taken as indicating the final opinion
of the court on this point. Where a corporation has not been at any
actual expense to pave over mains, and where it has not expected
any allowance to be made for this item, — in which its expectation
would be different from that in the case of land, — the commis-
sions, it seems to us, have no good groimd for allowing anything for
this item in estimating value as a basis for rates.
In the matter of deducting depreciation from the value of the
property upon which a public-service corporation shall be allowed
General rule ^° ^^^'^ ^ ^^^^ rctum, the rules and decisions of the
for treatment commissions and of the courts vary considerably,
in estimating Generally, the commissions and courts deduct accrued
air va ue depredation from the estimated reproduction cost or
from the original cost when making use of these factors in valuations
' For diflSculties involved in the use of present unit prices, see Buffalo Gas Co. v.
City of Buffalo, 3 P. S. C. (2d Dist. N.Y.) 553 (1913).
2 New York, ist Dist. (sustained by New York Court of Appeals) : Kings County
Lighting Co., People ex rel., v. Willcox, 210 N.Y. 479 (1914); New York, 2d Dist.:
Buffalo Gas Co. v. City of Buffalo, 3 P. S. C. (2d Dist. N.Y.) 553 (1913); New Jersey:
In re Rates of the Public Service Gas Co., i N.J. B. P. U. C. 433 (1912); Wisconsin:
City of Milwaukee v. The Milwaukee Electric Ry. & Light Co., 10 W. R. C. R. 1, 116
(1912); California: City of Palo Alto v. Palo Alto Gas Co., 2 Cal. R.R. Com. Dec. 300
(1913); City of San Jos6 v. The Pacific Tel. & Tel. Company, 3 Cal. R.R. Com. Dec.
720, 727 (1913); United States District Court: Des Moines Gas Co. ». City of Des
Moines, 199 Fed. Rep. 204 (1912).
' 212 U.S. 19 (1909).
PUBLIC-SERVICE CORPORATION BONDS 225
for the purpose of fixing rates.' Where companies have created
depreciation reserves invested in plant and working capital, the
Wisconsin Commission, in a recent case, has deducted depreciation
from cost new and added the depreciation reserves. ^
It has been argued that a plant that has depreciated still may
render as efficient service as when it was new,* and that therefore
no depreciation need be deducted. It has also been Treatment of
contended that the necessity, in the absence of a ^dlrTarf^us
depreciation fund, for stockholders maintaining the circumstances
plant prevents the investment from becoming diminished.* Again,
an effort has been made to distinguish between cases where proper
allowance for depreciation in effect has been returned to the owners
— in which cases, accrued depreciation should be deducted — and
cases where sums set aside for depreciation are allowed to accumu-
late for the benefit of a sinking fimd — in which cases no deduction
for depreciation should be made.^
Perhaps the best statement of the proper treatment of depreda-
tion in estimating value as a basis for rates is given by the New
Hampshire Pubhc-Service Commission in the case of „
, , Summary of
the Berlin Electric Light Company: ^ "We do not depredation
hold that the full amoimt of depreciation should in '^^^ '°"
every case be deducted from the cost of reproduction. It is merely
one of the facts to be considered in making a finding of fair value.
It stands in the same category as original cost of physical proper-
ties, other necessary early expenditures, present reproduction cost
of physical properties, and other facts concerning which inquiry is
made, all of which should be determined as accurately as possible,
1 United States Supreme Court: Knoxville v. Knoxville Water Co., 212 U.S. i, 29
Sup. Ct. 148 (1909); Minnesota Rate Cases: 230 U.S. 352 (1913) ; New York Commis-
sion for ist Dist., upheld on this point by the Appellate Division of the New York
Supreme Court: People ex rd. King's County Lighting Co. v. Willcox, 156 New York
App. Div. 603 (1913) ; see also 2 P. S. C. (ist Dist. N.Y.) 659; California: City of Palo
Alto V. Palo Alto Gas Co., 2 Cal. R.R. Com. Dec. 300 (1913).
' City of Milwaukee v. Milwaukee Electric Ry. & Light Co., 10 W. R. C. R. i
(1912); Superior Commercial Club ». Duluth Street Railway Co., 11 W. R. C. R. i
(191 2).
' Edwards et al. v. The Helena Light & Ry. Co., Sixth Annual Report, Railroad
Commission of Montana, p. 194 (1913).
* City of Whitewater v. Whitewater Electric Light Co., 6 W. R. C. R. 132, 138
(1910).
' Fuhrmanns. Cataract Power & Conduit Co., 3 P. S. C. (2d Dist. N.Y.) 656 (1913).
• See In re Sale of Berlin Electric Light Co., 3 N.H. P. S. C. 174, 194, 195.
226 AMERICAN AND FOREIGN INVESTMENT BONDS
but none of which have a uniform fixed value in each case. There
may be cases where plants well conceived and well managed have
suffered depreciation which in fact represents a part of the cost of
developing the business to a point where a fair return can be se-
cured. In other cases, as, for example, where adequate returns
have been received to afford a fair return and to maintain a depred-
ation reserve, but have been entirely paid out in dividends, the
entire amoimt may properly be deducted from present cost of re-
production in coming to the final conclusion as to the fair value.
Between these two extremes the proper course will vary according
to the circumstances in each case. But in every case it is desirable
to determine, for the purpose of consideration, the fuU depreciation
as accurately as possible." The whole problem of allowing for
depredation is a problem in cost accoimting. The methods through
which depredation may be determined are almost numberless.
In the KnoxviUe Water case ^ and in the Minnesota Rate Cases,
TT ■ J o . the United States Supreme Court has held that in
United States ... , , .
Supreme Court cstunatmg the cost of reproduction new, the extent of
epreaa on g^gj^g depredation should be shown and deducted.
In estimating value as a basis for rates, an allowance almost
always is made for overhead charges. This item commonly is used
to indude the cost of engineering and superintend-
overhead ence, contractor's profit, interest during construction,
charges in esti- i i i i • , ■
mating value as legal and general expenses, company organization,
a basis or rates ^^^gg g^jj^j insurance, expenses of promotion, and con-
tingendes. Although there have been cases in which the necessity
for any separate allowance for overhead charges has been ques-
tioned,'' the general tendency is to make a fairly liberal allowance
for this item. Commissions and courts vary greatly not only as to
the amoimt to be allowed, but also as to the method of computing
allowances. Wherever the actual expenditures for overhead charges
can be proved from the records of the company or otherwise, they
wiU form the basis for allowance imder this head.' The company
1 KnoxviUe v. KnoxviUe Water Co., 212 U.S. i, 29 Sup. Ct. 148 (1909).
' Cedax Rapids Gas Light Co. v. Cedar Rapids, 144 la. 426, 120 N.W. 960 (1909),
223 U.S. 655. See also Cumberland Tel. & Tel. Co. v. City of LouisvUle, 187 Fed.
Rep. 637, 646, 647 (1911).
* See Report, St. Louis PubUc-Service Commission, to the Municipal Assembly of
St. Louis on rates for electric light and power (February 17, 1911), p. sa
PUBLIC-SERVICE CORPORATION BONDS 227
will not be permitted, however, by means of a contract with the
construction company to impose unnecessary and unreasonable
overhead charges. ^ Where actual expenditures for overhead
charges carmot be ascertained, — a situation which prevails in a
majority of cases, — commissions resort, as a rule, to a percent-
age allowance upon the cost of items included in the general term
"reproduction cost." The New York Commission, First District,
has allowed in one case fifteen per cent for engineering incidentals
and similar items on costs where these charges properly would
apply, and ten per cent for general contractor's profit.'' The Wis-
consin Commission in one case has allowed on the total inventory
reproduction cost five per cent for engineering and superintendence,
four per cent for interest during construction, and three per cent
for legal expenses, organization, casualties, omissions, and other
similar items; ' in another case, instead of allowing a total of twelve
per cent for overhead charges, the Wisconsin Commission has al-
lowed a total of fifteen per cent.* The California Cormnission has
considered as an adequate allowance for overhead charges in the
case of a gas company fifteen per cent on the reproduction cost of
the plant.^ In determining the proper amount of overhead charges,
the commissions should use, as in all other questions of valuation,
discretion in each individual case.
Another question to be determined in estimating value is whether
any allowance should be made for going-concern value. Going-
concern value in rate cases generally is considered to ^g^^^^^ f^^
be equivalent to the uncompensated losses incurred in development
the development of the business. It is often called going-con-
development expense. It should not be confused with "™ ^^^^^
good-will, which has no place in estimating the value of a public-
service corporation under monopolistic conditions. The Massa-
chusetts Board of Gas and Electric Light Commissioners has
refused to consider going-concern value in rate cases.® As a general
» litre Application of N.Y. & North Shore Traction Co., 3 P. S. C. (ist Dist. N.Y.)
63 (1912).
2 Mayhew v. Kings County Lighting Co., 2 P. S. C. (1st Dist. N.Y.) 659 (1911).
• City of Ripon v. Ripon L. & W. Co., s W. R. C. R. i, 13 (1910).
* City of Milwaukee v. Milwaukee Gas Light Co., 12 W. R. C. R. 441 (1913).
» City of Palo Alto v. Palo Alto Gas Co., 2 Cal. R.R. Com. Dec. 300 (1913).
» See Re Haverhill Petitions, Twenty-eighth Annual Report, Gas & Electric Light
Com'rs, pp. 41-50 (1912).
228 AMERICAN AND FOREIGN INVESTMENT BONDS
rule, however, commissions and courts recognize the fact that
development expense or going-concern value should be reimbursed
to the company either by an increase in the fair value on which the
return is allowed or by an increase in income to enable amortization
of early losses. ^ Sometimes commissions have refused to make any
allowance for going-concern value because of the insufficiency of
the evidence offered,^ and sometimes on the groimd that early
deficits have been recouped out of subsequent profits,' or on the
fact that consciously or unconsciously the going-concern value has
been included in the valuation of the physical plant.^ As stated
above, however, the best practice favors a reasonable allowance for
going-concern value.*
The last question to be discussed in connection with detailed
methods of valuation is that of franchise value. It is provided by
Franchise Statute in Wisconsin: "In determining the value of
value ^jjg property of a public-service corporation or any
person furnishing service to the public for the purpose of this act,
no franchise to be a corporation and no franchise or privilege
granted to such corporation by the State or municipality shall be
appraised, fixed, or considered at any greater sum or value than the
sum paid therefor into the public treasury of the State or mimici-
pality granting the same." ^ The above statute embodies the best
and in fact the almost universal modem opinion as to the treatment
of franchise value in rate cases. In spite of a few cases where,
through failure to distinguish between rate cases and purchase
1 See Kings County Lighting Co. b. Willcox, 2io N.Y. 479 (March 24, 1914);
141 N.Y. Sup. 677. City of Palo Alto v. Palo Alto Gas Co., 2 Cal. R.R. Com. Dec.
300 (1913).
* See Bachrach v. Consolidated Gas, etc., Co. Public Service Com. of Maryland
Reports, vol. iv, pp. 39-46 (1913).
' Union City v. Union Heat, Light and Power Company, February 7, 1914, Indiana
Public Service Commission (s Rate Research, 69).
* Indiana Public-Service Commission (s Rate Research, 69). See Des Moines Gas
Co. V. City of Des Moines, 199 Fed. Rep. 204 (1912).
' See especially, for interesting discussions of this subject, and of other intangible
elements which may enter into rate cases, Fuhrmann v. Cataract Power and Conduit
Co., 3 P. S. C. (2d Dist. N.Y.) 656; Superior Commercial Club v. Superior Water, etc.,
Co., 10 Wis. R. C. R. 704; City of Milwaukee v. The Milwaukee Electric Railway and
Light Co., 10 Wis. R. C. R. i; City of Green Bay v. Green Bay Water Co., 11 Wis.
R. C. R. 236.
* Laws igii, chap. 593, sec. 1753-15.
PUBLIC-SERVICE CORPORATION BONDS 229
cases, an allowance has been made for franchise value,' it is now
generally recognized that the value of a franchise is created, not
by the company which owns it, but by the community served.
Hence, it is unjust to compel the commimity to pay higher rates
on account of a privilege conferred by the community itself.^
We have discussed above the various factors usually taken into
consideration in estimating a fair value of the property upon which
a fair rate of return shall be allowed. No hard-and- ^
. Summary of
fast rules can be laid down. The very purpose of valuation as a
havmg state public-service commissions with dis-
cretionary powers is to make possible the determination of each
case on its own merits — with due regard, of course, to certain
general principles. If it were possible to make rigid rules to apply-
in all cases, it would be possible to embody those rules in statutes
enfordble simply by the courts. Aside from its impossibility, how-
ever, a system of valuation based on rigid rules would defeat the
principal purpose of regulation; that is, to give a square deal to the
public and to the corporation. In the words of the Public Service
Commission, Second District, New York, as expressed in the
Buffalo Gas Case,^ February 4, 1913: "What is called the fixing of
the value of the property in the public service for the purpose of
rate-making is not a fixing of value in any proper sense of that
word as it is correctly used in our language. It is a determination,
of what, imder all the facts and circumstances of the case, is a just,
and equitable amount upon which the return allowed to the cor--
poration is to be computed. If the time the determination is made
happens to be at or near the time the plant is put in operation, the
investment or original cost may be the predominant factor. If the-
time of determination is remote from the time of investment, the-
factor of appreciation or diminution in values arising from changes
in costs of labor and materials may enter largely into the result. If
' See, for example, Consolidated Gas Co. v. City of New York, 157 Fed. Rep. 849,
872; Willcox V. Consolidated Gas Co., 212 U.S. 19, 48 (1909).
2 See Fuhnnann v. Buffalo General Electric Co., 3 P. S. C. (2d Dist. N.Y.) 739
(1913); In re Haverhill Petitions, Twenty-eighth Annual ife^ori, Massachusetts Board
of Gas and Electric Light Com'rs. (1912), pp. 41, 50; Re Rates of the Public Service Gas
Co., I N.J. B. P. U. C. 433 (1912); Public Service Gas Co. v. Board of Public Utility
Commissioners, 84 N.J. 463; 87 Atl. 651 (1913); Cedar Rapids Gas Light Co. v. City of
Cedar Rapids, 223 U.S. 655, 669 (1912).
» Buffalo Gas Co. v. City of Buffalo, 3 P. S. C. (2d Dist. N.Y.) 553 (1913).
230 AMERICAN AND FOREIGN INVESTMENT BONDS
the plant is unreasonably disproportionate in size to the service
required of it, the cost of reproduction new cannot be the sole test.
If the actual investment has been reckless and extravagant, the
owners should bear the loss and not the public. If the general scale
of prices and values in the community has been increased or dimin-
ished since the plant was built, the owners may be fairly called
upon to share the general diminution; and on the other hand, may
justly demand a share in the general appreciation to which the
existence of their property has, it may fairly be assumed, con-
tributed at least its proportionate share." This completes what we
have to say on the subject of valuation as a basis for rates.
We have discussed commission regulation of public-service
Commission Corporations in the matters of monopoly, service, and
^STtion rates. We will now take up briefly the poHcy of the
and accounts commissions in the matters of capitalization and
accounts.
Control of capitalization is exercised through approval or dis-
thorit of approval of the issue of securities. In Massachusetts,^
commissions to New York,'' Wisconsui,' California,^ and many other
approve issue States, the commissions have authority to approve
o secunties ^^ disapprove the issue of bonds and stocks.
In New York State, the statutes provide, in substance, that pub-
lic-service corporations may issue, when necessary, stock, bonds,
notes, or other evidences of indebtedness payable at more than
twelve months from the date of issue: —
(i) For the acquisition of property.
(2) For construction, completion, extension or improvement of
their facilities.
(3) For the improvement or maintenance of their service.
(4) For the discharge or lawful refimding of their obligations or
• Acts igo6, chap. 463, part 3, sees. 103, 104, 107, 108, 109, iii; Acts igo8, chap.
636; Acts igog, chap. 485; Acts igio, chap. 536; Acts igi3, chap. 784, sees. 13 and 16;
Acts igi3, chap. 764; Acts igi4, chap. 742, sees. 35, 38, 39, 40, 41, 42, 43, 44; Acts 1914,
chap. 671. See Fall River Gas Works Co. v. Board of Gas and Electric Light Com'rs.
214 Mass. 529 (1913).
' Laws igio, chap. 480, sees. 55, 69, 101 (as amended by Laws igio, chap. 673).
See also Laws igiz, chap. 289; Laws igi4, chap. 220.
' Stats, igii, chap. 85, sec. 1733 as amended by Laws igis, chap. 398 and chap.
773, see. 70.
' Stats, igii, Extra. Sess., p. 18, as amended by Stats. igt3, chaps. 339 and 333;
Herming's Gen. Laws of California (1914), vol. 3, p. 1338, act 3773, sec. 52.
PUBLIC-SERVICE CORPORATION BONDS 23 1
for the reimbursement of moneys actually expended from income
or from other moneys not obtained from the issue of securities.
The order of the commission authorizing such issue shall state
the amount of securities and the purposes to which the securities
or the proceeds are to be applied; that the money,
property, or labor to be procured or paid for by the ^curTtli in
issue of such securities is or has been, in the opinion gtltelran
of the commission, reasonably required for the pur- example of the
' ,1 best practice
poses specified m the order; and that such purposes
are not, in whole or in part, reasonably chargeable to operating
expenses or to income. The commission is forbidden to allow the
capitalization of franchises beyond the actual amount paid there-
for to the State or to any subdivision thereof. The commission
cannot approve capitalization of a corporation formed by merger
to an amoimt in excess of the combined capitalization of the com-
panies merged,^ nor can it approve the capitalization of any con-
tract for consolidation or lease. For the issue of notes and similar
obligations, payable in less than one year, the consent of the
commission is unnecessary.^ These provisions are typical of the
best practice in the States where the comnaissions have authority
over the issue of securities.
Many people have held that if service and rates are regulated,
there is no necessity for regulating the issue of securities. This rea-
soning does not take into account the interests of
investors. In the words of Dr. Maltbie, of the New commission
York PubUc-Service Commission, First District: the issue of
"The State owes a duty towards investors as well as ^^"^"""^
it does towards shippers and passengers. Further, proper regula-
tion of securities will ultimately affect rates and service. It may
not immediately, but in the long run better service and lower rates
will be given by corporations that are upon a sound financial basis
than by those having a great overcapitalization and unsound financ-
ing." ' Undoubtedly it is true that overcapitalization has a tend-
' See, however, Rockland Light and Power Case, dted on page 214, note 3.
' As an illustration of the practical working of these provisions see: In the Matter
of the Application of the New York and Ontario Power Co., i P. S. C. R. (2d Dist. N.Y.)
453 (1909); People ex rd. Binghamton L. H. & P. Co. v. Stevens, 203 N.Y. 7 (191 1).
' Quoted by J. M. Eshleman in " Should the Public Utilities Commission have Power
to Control the Issuance of Securities," State Regulation ofPubUc Utilities, p. 160.
232 AMERICAN AND FOREIGN INVESTMENT BONDS
ency to lead either to poorer service or to higher rates. Even where
the commissions have full authority over service and rates, it is
much more difficult for them to make this control effective, if they
are dealing with a corporation attempting to earn an attractive
return on an excessive amount of securities. The strongest argu-
ment, however, for the control of the issue of securities by commis-
sions is the protection of investors.*
The only other important phase of regulation of public-service
corporations by state commissions is the supervision of accounts
Supervision and the ordering of reports. There are provisions for
and ordering ^hc regulation of accounts in upwards of one half the
of reports States. Usually the commission has authority to
establish a system of uniform accounts. In Indiana, the commis-
sion must prescribe accounting practices.^ In many States provi-
sion is made for special depredation accounts. In practically all the
States the public-service corporations must make regular periodic
reports to the commissions.
It is to be remembered that all orders of the commissions in the
various States are subject to a greater or less degree of review by
- ,. . , . the courts. In Colorado ' and in CaUfomia,* by stat-
of commission ute, the findings and conclusions of the commissions
on questions of fact are made final and are not subject
to judicial review. In several other States the limits within which
judicial decisions may operate are laid down by statute. In Rhode
Island,^ Connecticut,* California,' and several other States, orders
of the commission may be suspended pending review by the court.
"The right of appeal and judicial review is statutory and therefore
subject to the will of the legislature within the constitutional limita-
tions of due process and equal protection of the law with respect
1 Aside from the direct power of commissions to approve or disapprove the issue of
new securities, there is a form of control which consists simply in making public the
facts about the issue of new securities and the purposes for which they are issued.
This is the method in the main recommended by the Railroad Securities Commission
appointed by President Taft in 1910.
' Acts igi3, chap. 76, sees. 15-17.
' Colorado, Session Laws, 19x3, chap. 127, sec. 52.
* Stats, igii, ist Extra. Session, chap. 14, sec. 67; Henning's General Laws of Cali-
fornia (1914), act 377S, sec. 67, p. 1566. 1
' Laws igiz, chap. 795, sec. 33. ° Puhlic Acts igii, chap. 128, sec. 33.
' Laws igii, Extra. Session, chap. 14, sec. 68; Henning's General Laws of California
(1914), act 377S, sec. 68, p. 1566.
PUBLIC-SERVICE CORPORATION BONDS 233
to the preservation of property and contract rights." ^ This finishes
what we have to say on the regulation of public-service corpora-
tions by state commissions.
There has been recently a considerable movement in some places
in favor of regulation by the local communities instead of by the
State. ^ There have been advanced three arguments: state c^. local
(i) That the local community is better able to judge f«g"'a.tion
of its own needs than is the State; (2) that local self -sufficiency or
home-rule should not be weakened; (3) that local, instead of state,
control will make easier purchase and operation of a public-service
corporation by the mimicipahty. In Los Angeles, California, under
the combined authority of the City Council and the local Board of
Public Utilities, there has been worked out a reasonably satisfac-
tory system of local regulation.' In view of the fact that so many
public-service corporations operate in more than one municipahty,
local regulation, it seems to us, is likely to lead to the same conflict
between difierent municipahties and between municipalities and
the State as prevails in the case of steam railroads between the dif-
ferent States and between States and the Federal Government.
Local regulation, moreover, is liable to be too provincial. Exclusive
and more or less uniform regulation * of local public utilities by the
State seems to us, on the whole, the best solution.
' Oscar L. Pond, Methods of Judicial Review in Relation to Effectiveness of Commis-
sion Control in State Regulation of Public Utilities (Philadelphia, 1914), p. 64.
2 See Report of D. F. Wilcox, Chainnan of Committee on Franchises of the National
Mimidpal League, November 13, 1913, and Report of Conference of American Mayors,
held in Philadelphia, November 13 and 14, 1914 {Commercial and Financial Chronicle,
vol. 99, p. 1510).
' See State Regulation of Public Utilities, pp. 108-18.
* There has been drawn up recently and submitted to a great many different inter-
ests a so-called "Uniform Utilities Bill." The main provisions of this bill are as fol-
lows: (i) State commissions to have power to prevent needless competition through
control of the issue of certificates of public convenience and necessity; (2) state com-
missions shall control consolidation; (3) all franchises granted to public utilities which
do not provide for possible purchase by the municipality shall be indeterminate; (4)
municipalities shall have the right to purchase public utilities, in case of disagree-
ment as to price, at a value to be determined by the state commissions; (5) state
cominissions shall enforce adequate service and shall have power to investigate ser-
vice on their own motion; (6) state commissions shall have full power, subject to
law, to prescribe rates; (7) they shall have supervision of the issue of new securities;
(8) they shall prescribe uniform sj'stems of accounts. (Draft Bill for the regulation
of public utilities with dociunents relating thereto, authorized to be published by the
National Civic Federation, October 23, 1914).
234 AMERICAN AND FOREIGN INVESTMENT BONDS
Related to the question of regulation of local public-service
corporations is the question of municipal ownership and operation.
Municipal Many of the franchises granted in recent years by
ownership munidpaUties to public-service corporations in the
United States, as shown earlier in this chapter, provide for purchase
of the property of the public utiKty by the municipality. In Massa-
chusetts, 1 Illinois,* Wisconsin,' and other States, definite provision
is made in the statutes for the purchase of public-service corpora-
tions for mimidpal ownership and operation.
In Massachusetts there were on June 30, 1913, thirty-six munici-
pally owned and operated lighting plants.* Of these thirty-six
plants, however, seventeen were distributing plants
operation in Only and bought their product. The results of muni-
assac use s ^^pg^^ operation in Massachusetts have varied consid-
erably. In many cases the community has obtained its street light-
ing at lower figures than otherwise obtainable, and has received a
good quality of commercial service at reasonable rates. In all the
municipal plants in Massachusetts the maintenance of a depreda-
tion fund, usually three per cent, is compulsory. Any deficit in-
curred in the operation of the plants is made up from taxes. Owing
to the almost limitless number of factors which enter into the ques-
tion of the success or failure of mimicipal operation, it is almost im-
possible to say what the true results have been. There is nothing
to show, however, that in most cases munidpal operation has not
worked out reasonably well.
There has been a considerable spread of mimidpal ownership and
operation of lighting plants outside of Massachusetts. In 1912,
„ . . , the total number of munidpal central electric stations
Muiuapal . .
ownersiiip and m the Umted States was 1562 as against 3659 stations
whareirTthe* privately owned and operated.^ When we try to
United states arrive at the comparative results of mxmicipal and
private operation throughout the United States, we find the same
' Acts igi4, chap. 742, sees. 92 to 125.
* Senate Bill no. 538, approved June 26, 1913; Laws igzj, p. 455.
' Laws igoj, chap. 499, sees. 1797M-74 to 1797M-86, as amended by Laws igog,
chap. 213, and by Laws igii, chaps. 12 and 596, and by Laws igij, chap. 160.
* See Twenty-ninth Annual Report, Board of Gas and Electric Light Commission-
ers, pp. 209-12.
" Department of Commerce, Bureau of the Census, Bulletin 124 (Washington,
1914), p. 14.
PUBLIC-SERVICE CORPORATION BONDS 235
difficulties as in Massachusetts. The differences in the compara-
tive size of the municipal and private stations, in the character of
the community served, in the proportions of lighting and of power
business, in the amoimts charged to depreciation and in the meth-
ods of keeping accounts, make a comparison of financial results at
present of very Kttle significance. If we attempt to compare serv-
ice, we will find ahnost always a difference of opinion. The munici-
pal electric lighting plant in Detroit is referred to usually as a
success. It has been in operation since 1895, and, except the plant
in Chicago, is the largest municipal lighting plant in the United
States. Detroit has secured its lighting on terms which compare
favorably with the prices charged by private companies in other
cities. The plant is managed by a Public Lighting Commission in
much the same way as a board of directors would conduct the affairs
of a well-managed private corporation.* The municipal electric
light plants in South Norwalk, Coimecticut, Allegheny, Pennsyl-
vania, and Chicago, Illinois, all have been cited as confirming the
wisdom of municipal ownership and operation.'' Municipal opera-
tion of gas works in Philadelphia, on the other hand, proved a fail-
ure and was abandoned.' The results of an investigation of the
commission on public ownership and operation of the National
Civic Federation, published in 1907, show that it is possible to ob-
tain two opinions almost diametrically opposite on the questions
of service, rates, and general success or failuxe of municipal as
against private plants.
In Great Britain and Germany, there has been a much greater
development of municipal ownership and operation than in the
United States. In both countries the properties usu- Municipal
ally have been operated without loss (after making o^l?i^n in°"^
due allowances) and in some cases with considerable Europe
profit. Where changes have been made during the past few years
from private to municipal operation, they have resulted, in most
cases, in better service. The service given, however, is very much
less developed than that furnished under private management in
> John Fairlie, Essays in Municipal Administration, New York, 1908, pp. 219-29.
2 E. W. Bemis, "Municipal and Private Operation of Public Utilities," Report to
the National Civic Federation, Commission on Public Ownership and Operation
(New York 1907), vol. i, part i, pp. 165, 169, 175.
• Ibid., p. 149, and Fairlie, p. 271.
236 AMERICAN AND FOREIGN INVESTMENT BONDS
the United States.' Municipal operation of street railways in
Great Britain, particularly in Glasgow, Scotland, and in Liverpool
and Leeds, England, has proved on the whole satisfactory. It has
resulted in extension of service and usually in a reduction of fares.
It has also resulted favorably from a financial point of view.^ It is
to be remembered that municipal operation of tramways in Great
Britain has been developed for the most part under fairly good
pohtical conditions. Among the well-known municipal gas plants
in Great Britain may be mentioned those in Birmingham, Man-
chester, Leicester, and Glasgow. London has several municipal
electric plants which appear to have shown a fair degree of suc-
cess.* Outside of Great Britain, we find in Vienna the largest mu-
nicipal street railway system ia the world and also mimicipal gas
works; in Bologna, Leghorn, Padua, and Pisa, Italy, we find munic-
ipal gas plants.* On the whole, the service furnished by these
municipal utilities in Vieima and in Italy has been at least fair,
although less developed than the service furnished under private
operation in the United States. The rates charged have not been
particularly low for the service furnished. The financial results
appear to be fairly satisfactory.^ To sum up, perhaps it is fair to
say that municipal operation of public utilities in Europe has given
reasonably satisfactory results. The political conditions have been
more favorable than in the United States.
Purchase and operation of public utilities by municipalities in
Munidpai the United States involve fewer difiSculties than
ownership of pubKc Ownership and operation of the steam railroads.
public utilities '^ ^ _ J^
more feasible Under our present fairly satisfactory system of state
but less neccs*
sary than regulation of local utilities, however, municipal own-
omiereSp"of ership * of these properties seems even less necessary
railroads ^g^j^ government ownership of railroads,
• FairUe,p. 272.
2 "Munidpai and Private Operation of Public Utilities," Report to National Civic
Federation, Commission on Public Ownership and Operation (New York, 1907), voL i,
part I, pp. 263 to 297. See also lUd., vol. n, part 2, " British Tramways."
' Fairlie, p. 301.
' Ibid., pp. 325-28 and 341-49. ° Ibid., pp. 325-28 and 34S-49.
° For several interesting articles on municipal ownership and on the relation of the
public to public-service corporations, see "Public Policies as to Municipal Utilities,"
in the Annais ol the American Academy of Political and Social Science, vol. Lvn,
no. 146 (January, 1915).
PUBLIC-SERVICE CORPORATION BONDS 237
We have confined our discussion of public-service corporations
so far mostly to street railway, gas, and electric light and power
companies operating in local communities. There is Relation of
another large class of public-service corporations — compamesTo
the telephone companies. These companies do usually *^ ^^^^'^
an interstate business. The question of the relation of these cor-
porations to the public is a perplexing one. The telephone business
is in its very nature of a peculiarly monopolistic character. We
ourselves feel that the final solution will be either ownership and
operation by the Federal Government or operation of the proper-
ties as a unit under a federal license or charter — with the same
sort of regulation as to service, rates, and capitalization as is pro-
vided in the authority of state commissions over public-service
corporations located wholly within one State.
A recent report of the Postmaster-General of the j, ^ ^f j^g
United States ^ made the following suggestions: — Postmaster-
(i) That Congress declare a government monopoly telegraph and
over all telegraph and telephone lines and over
certain other means of communication.
(2) That Congress acquire by purchase at appraised value the com-
mercial telephone network, except the farmer lines.
(3) That Congress authorize the Postmaster-General to issue, in his
discretion and under such regulations as he may prescribe, revoc-
able licenses for the operation by private individuals, associations,
companies, and corporations of the telegraph service and such
parts of the telephone service as may not be acquired by the
Government.
The report states that the United States is the only one of the
leading nations which has left to private enterprise the ownership
and operation of telegraph and telephone facihties.
It is undeniable that the telephone business comes as near to
what may be called a legitimate government mo-
nopoly as any public-service business still in the exdiSve re^-
hands of private owners. Furthermore, there would Fed°era^Govem-
be certain economies in the operation of telephone mf°t of ,.
^ . ^ telephone hnes
lines in connection with the postal service — such as
the use of the present real estate of the postal service and the use
' Government Ownership of Electrical Means of Communication, 63d Cong., 2d Sess.,
Document no. 339, p. 13.
238 AMERICAN AND FOREIGN INVESTMENT BONDS
of stamps for the collection of charges. If these properties are not
taken over and operated by the Federal Government, or taken over
by the Govermnent and operated by private corporations under
licenses, there should be established, it seems to us, exclusive
federal regulation of the private corporations.
Another class of properties where the question of possible federal
control enters in are the water-power developments on navigable
Water-power Streams. Undoubtedly the Federal CJovemment has
developments ^jjg right to exercise over these properties any degree
of control that it sees fit. On the other hand, the States where any
particular water-power developments may be situated are Ukely
to feel that regulation belongs to them. There were introduced in
the Sixty-third Congress various bills dealing with this subject. A
suggestion which has in it many reasonable features for a settle-
ment of this question is as follows: —
(i) Public ownership, federal or state, of the site and of the
water-power.
(2) Lease to a private corporation for operation.
(3) Control over competition, service, and rates by some com-
mission.
It seems to us that federal ownership of the site and water-power,
lease to a private corporation for operation and control over com-
petition, service, and rates by some federal commission, would be a
reasonable solution in the cases of corporations doing an interstate
business, and a similar programme with the State substituted for
the National Government in the cases of corporations doing a busi-
ness wholly within one State. The same danger of conflict of
authority, however, together with the fact that the Federal Gov-
ernment has ultimate control over navigable streams, may make it
desirable to have the whole matter considered a concern of the
Federal Government. It is to be hoped that the settlement of this
problem will not be such as to discourage the development of
water-power.
In the entire matter of the relation of public-service corporations
„ , , ^. to the public, there is likely to be from time to time
Broad relation '^ ' •'
of pubUc-ser- more or less of a see-saw between abuse of opportu-
tionsTo'Se^ nities by private interests and over-severity or nar-
peopie rowness on the part of the public or its representa-
PUBLIC-SERVICE CORPORATION BONDS 239
tives. Regulation by commissions may swing like a pendulum
from a policy of undue interference and repression to a policy of
undue subservience to corporation influence. It is well to remem-
ber, as Mr. Vail, president of the American Telephone and Tele-
graph Company, has said in substance, that the prosperity and
even the existence of the public-service corporation is dependent
in the last resort on the good-will and acquiescence of the public'
Only on the basis of giving good service at reasonable rates, obey-
ing the laws and recognizing public opinion can private ownership
of pubKc-service corporations endure.
In an attempt to make clear certain principles governing the
safety of public-service corporation bonds, we have Debt and eam-
discussed earlier in this chapter the relation of debt to 1°^;°!^"'''^'"
property or assets. We wish now to say a few words corporations
about earnings.
In the matter of gross earnings, public-service corporations have
shown a marked degree of growth and stability over a long series of
years: for instance, whereas the gross earnings of g^^..^
steam railroads, operating 199,726 miles of road, for gross earnings
the year ending December 31, 1908, — the first fuU semce "^
year after the panic of 1907, — showed a loss of 11.90 corporations
per cent compared with the previous year,^ the gross earnings of
forty representative public-service corporations for the same period
showed an increase of about 7.15 per cent.' Again, railroads oper-
ating 249,726 miles of road showed for the calendar year 1914 a
loss in gross earnings of 6.79 per cent compared with 1913,*
whereas forty representative public-service corporations showed
for the same period an increase of about 4.13 per cent.^ The experi-
ence of most public-service corporations has been that of a more or
less steady increase in gross earnings through good times and bad.*
1 See Address of Theodore N. Vail, President, at the opening of the Annual Con-
ference of the Bell Telephone System, New York, October, igi3.
' Commercial and Financial Chronicle, "The Financial Review" (Annual, 1915),
p. 106.
' Figures from Messrs. N. W. Harris & Co., Inc.
* Commercial and Financial Chronicle, "The Financial Review" (Annual, 1915),
p. 106.
' Figures from Messrs. N. W. Harris & Co., Inc., in letter dated March 30, 1915.
" During the current year (1915), the "jitneys" have cut into the earnings of street
railways somewhat seriously. Our opinion is that the "jitneys" ultimately will serve
240 AMERICAN AND FOREIGN INVESTMENT BONDS
In the matter of net earnings, we give below some figures for net
earnings per one hundred dollars of outstanding securities of gas
and electric companies in most of the large cities
of the United States as compared with figures for
railroads and industrial concerns: —
Net earnings per one hundred dollars of outstanding securities
igo2-ii, inclusive
Gas and electric companies $8.45
Industrials 7.79
Railroads 4.25
As illustrating the freedom from dangerous fluctuations in
net earnings, the following figures giving the average annual
amoimt of securities in receivers' hands per one
Net eanungs , , , , „ , ,. . . f .
and receiver- hundred dollars of outstanding securities dunng a
^^ period of thirty years, from 1882 to 191 1 inclusive,
may be of interest: —
Gas and electric companies $ .37
Railroads 1.84
Industrials 2.07
The above figures show a far better record as to receiverships for
gas and electric companies than for railroads and industrials.^
We wiU refer briefly to the question of receiverships and reor-
ganizations of public-service corporations. The same problems of
readjusting capitalization and exchanging old securi-
and reorgani- ties f or ncw as wc f oimd in the cases of steam railroads
°^ have arisen in the cases of public-service corporations.
Interesting reorganizations are those of the Michigan Telephone
Company (1904), controlling the Bell Telephone business in the
State of Michigan; the Chicago Union Traction Company (1907),
controUing a large part of the street-railway business in Chicago;
the Hudson River Electric Power Company (191 1), controlling
hydro-electric plants in New York State; and the Metropolitan
Street-Railway Company (1911), controlling most of the surface
street-railway lines in New York City.
principally as useful feedeis rather than as dangerous competitois of the street rail-
ways.
' Information obtained from pamphlets published by Messrs. Henry L. Doherty &
Co., dated February 20, 1913, and April 21, 1913.
PUBLIC-SERVICE CORPORATION BONDS 24I
The properties of the Michigan Telephone Company were sold
at foreclosure to interests representing the bondholders November
4, 1903. There had been default in interest due July i, Reorganization
1902, on $4,715,000 mortgage bonds. As is usual in gl^Tekphone
such cases, many reasons may be brought forward to Company
account for the default. In a general way, it may be said that the
community served had grown too fast for the company. Rapid
extensions were required, the rates were too low to pay a fair return
on the new capital, and the physical condition of the properties
deteriorated. On the whole, the management was not able to cope
with the situation. There was, moreover, considerable competition
from independents — especially in Grand Rapids. The attitude
of the public was unfriendly. There was a considerable floating
debt held largely by the same interests that controlled the stock.
The physical properties of the company had been appraised at an
amount considerably in excess of the bonded debt. The price
obtained at foreclosure sale ^ was $4,100,000 — compared with a
bonded debt of $5,000,000. The company was reorganized accord-
ing to plan shown in the table on page 242.
This reorganization may be said to have been entirely in the
interests of the old bondholders. In December, 1909, the market
value of the securities received in exchange for each $1000 of old
Michigan Telephone 5 per cents was, at the bid prices, exactly
$1300.^ Later, about ninety per cent of the common stock of
the Michigan State Telephone Company was exchanged for
stock of the American Telephone and Telegraph Company on
the basis of five shares of the former for four shares of the
latter.
The properties controlled by the Chicago Union Traction Com-
pany — operating mostly on the north and west sides of the City
of Chicago — were sold at foreclosure to a protective Reorganization
committee January 25, 1908. Many of the old fran- union xSon
chises had expired, and the so-called "Ninety-nine- Company
Year Act" — which the companies had considered gave them the
right to operate all their lines in the city of Chicago — had been
' Commerkal and Financial Chronicle, vol. 77, p. 1750.
2 Bank and Quotation Section of tiie Commercial and Fitumcidl Chronicle, Decem-
ber 4, igog, pp. 31 and 48.
242 AMERICAN AND FOREIGN INVESTMENT BONDS
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PUBLIC-SERVICE CORPORATION BONDS 243
held by the Umted States Supreme Court ^ to be not a franchise.
There began a long fight, led by ex-Mayor Dunne, for municipal
ownership and operation. During this fight the physical condition
of the properties deteriorated badly. The holding company — the
Union Traction Company — was grossly overcapitalized and was
justly unpopular. Receivers were appointed for the North Chicago
Street-Railroad Company and the West Chicago Street-Railroad
Company, the two leading operating companies, in April, 1903.*
At foreclosure sale,' the price obtained for the combined properties
was $2,090,000, compared with a total debt of $33,490,126. The
companies were reorganized in accordance with plan shown on
page 244.
This reorganization was in the interests, partly of the old secur-
ity-holders, but more in the interests of the public. Perhaps its
primary object was to make possible the giving by the successor of
the old companies of adequate street-railway service to the city of
Chicago. The old security-holders have not under all the circum-
stances fared particularly well up to date.
The properties of the Hudson River Electric Power Company
and its seven controlled companies were sold at foreclosure sale
August 29, 1 911. The troubles of the old companies, Reorganization
besides the complicated nature of their relations to one ^^^^ He't^°°
another, were due mainly to unexpected engineering Power Com-
problems which resulted in greatly increased costs controlled
and finally in overcapitalization. There were in addi- ™ -companies
tion these difficulties: inadequate control of the water flow and
inadequate steam reserve, low-priced contracts, poor earnings, and
lack of strong financial backing. Receivers were appointed in
November, 1908.^ The price obtained at foreclosure ^ — including
the property of the Madison County Gas and Electric Company,
sold August 31, 191 1 — was $7,675,000, compared with a total
debt of the old companies of $11,965,667. The properties were
reorganized in accordance with plan given on page 245.
1 Act approved February 6, 1865 (amending an act approved February 14, 1859,
and an act approved February 21, 1861), entitled "An Act concerning horse railways
in the City of Chicago." See Blair v. City of Chicago, etc., 201 U.S. 400; 26 Sup. Ct. 427.
* Poor's Manual of Railroads (1907), p. 1085.
" Commercial and Financial Chronicle, vol. 86, p. 284.
* The Corporation Service (1910), p. 1735.
' Commercial and Financial Chronicle, vol. 93, p. 592.
244 AMERICAN AND FOREIGN INVESTMENT BONDS
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246 AMERICAN AND FOREIGN INVESTMENT BONDS
This reorganization, like that of the Michigan Telephone Com-
pany, was entirely in the interests of the old bondholders. There
was made, however, a sharp distinction between the old bonds of
the Hudson River Electric Company, the Hudson River Electric
Power Company, and the Madison County Gas and Electric Com-
pany, as compared with the old bonds of the other five companies.
The lines of the Metropolitan Street-Railway Company — con-
troUing most of the surface street-railway traffic in New York City
— were sold under foreclosure December 29, 1911. As is usual in
such cases, the causes of the trouble were many and various. There
was great congestion of traffic; and owing to the building of the
Reorganization subways, the traffic had to be moved under changed
ten s'treeS-'^' conditions. Through the Kberal giving of transfers,
way Company ^-j^g average fare had been reduced beyond the point
of profit. Added to these causes were heavy cost of repair work
and increased expenses in other directions. There had been also
gross over- capitalization, waste of assets, and mismanagement.
The physical condition of many of the lines became deplorable.
Receivers were appointed " about" September 27, 1907.* At fore-
closure sale ^ the price obtained for the property represented by
the old 5% bonds was $10,000,000, and for that covered by the
refunding 4% bonds, $2,010,000, or a total of $12,010,000. This
compared with a total debt held by the pubHc before reorganiza-
tion of $53,585,000. The properties were reorganized in accord-
ance with the plan shown on page 247.
This reorganization was a good deal like many steam-railroad re-
organizations. There was an effort to recognize all interests — in-
cluding those of the old stockholders. As in most steam-railroad
reorganizations, the stockholders were assessed to furnish new
capital.
It is to be noted that in the two street-railway reorganizations
treated above, the total debt after reorganization was
Summary of .,•■, ,1/. .. t
four reorgani- Considerably greater than before reorganization. In
the case of the New York Railways Company, how-
ever, a large part of the new debt was represented by bonds the
' Plan and Agreement for the Reorganization of the Metropolitan Streel-EaUviay
Company, p. 2.
* Commercial and Financial Chronicle, vol. 93, p. 1787.
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It
II
II
II
III
^•3 -
248 AMERICAN AND FOREIGN INVESTMENT BONDS
interest pajTnents on which were conditional, and in the case of
the Chicago Railways Company, by bonds bearing at first reduced
rates of interest. Both reorganizations sought to reduce largely
stock capitalization. In the other two reorganizations discussed,
— that of the Michigan Telephone Company and that of the
Hudson River Electric Power Company and its controlled com-
panies, — the debt was reduced after reorganization. In the four
reorganizations the principal methods of raising new capital were:
Michigan State Telephone Company, sale of new securities to old
bondholders and to bankers; Chicago Railways Company, sale of
new first-mortgage bonds to bankers; Adirondack Electric Power
Corporation, sale of new first-mortgage bonds to bankers; New
York Railways Company, assessment of certain old noteholders
and of old stockholders.
In summarizing the situation of public-service corporations we
Summary of would Say: (i) that pubHc-service corporations to-day
publc-°er^ce ^^^ recognized generally as regulated monopolies; and
corporations (3) that the Stability of the business and earnings of
such corporations are very great.
In trying to determine the safety of any given issue of public-
service corporation bonds, many of the same considerations prevail
, , as in the case of steam-railroad bonds. A first-mort-
Examples of
strong pubUc- gage bond of a street-railway, gas, electric light and
service corpo- ^ 1 1 i . i
ration bond powcr, or telephone company, havmg a large margin
issues p£ pj-Qpgjjy above its debt and located in an important
community, is, other things being equal, well secured. Examples
of exceedingly strong public-service corporation bond issues are:
New York Telephone 4^% 1939, Cleveland Railway 5% 1931,
Detroit Edison 5% 1933, and Laclede Gas Light (St. Louis), first
5% 1919. The New York Telephone 4^% bonds are part of a
closed mortgage for $75,000,000 ($3,340,750 of which have been
retired by sinking fund) , and are secured by a first lien, subject only
to $3 ,483 ,000 underlying or assumed bonds, on aU the property of the
company now owned or hereafter acquired. The assets of the com-
pany have been appraised at from somewhat over $200,000,000 to
over $250,000,000. The company operates the Bell telephone sys-
tem throughout the State of New York and also in important
territory in New Jersey. It also controls valuable lines in Pennsyl-
PUBLIC-SERVICE CORPORATION BONDS 249
vania.^ The Cleveland Railway 5% bonds are part of an outstand-
ing issue of $5,495,000, are secured by a first mortgage on all the
lines, and are followed by $25,784,900 capital stock representing
property.'' The company operates, under excellent franchise ar-
rangements, the entire street-railway system in Cleveland, Ohio.'
The Detroit Edison first 5% bonds are part of a closed mortgage
for $10,000,000, and are secured by a first lien, direct or indirect, on
all the property and franchises of the company in the city of Detroit.
The replacement value of the company's property is estimated
as somewhere near $31,000,000.* The company does all the com-
mercial electric-lighting and industrial-power business in Detroit,
Michigan.^ The Laclede Gas Light first 5% 1919 bonds are part of a
closed first mortgage for $10,000,000, and are followed by $12,500,-
000 junior bonds, by $2,500,000 preferred stock, and by $10,700,000
common stock pa3dng dividends of 7% per annum. The company
has an imusually strong franchise, and does all the gas business in
St. Louis, Missouri.^ It is to be remembered that no issue of public-
service corporation bonds, or of any other kind of bonds, is perfect
in all respects. Each issue must be judged after taking into con-
sideration all the factors entering into its safety.
In the early days of public-service corporation bond issues, con-
servative bankers, in their desire to make an issue as strong as
possible, often drew up a financial scheme which was Financial plan
too narrow and too rigid. For instance, many of the broad^ flexible
corporation bond issues were limited in total amount ^°<^ ^"^
authorized to a figure which later proved to be entirely inadequate
* See Poor's Manual of Public Utilities (1915), pp. 781, 785, and 2265, and Railway
and Industrial Section of the Commercial and Financial Chronicle, June 26, igiSf
P- IS9-
2 In the valuation of the property by Judge Taylor, as a basis for the franchise
granted in 1909, $3,615,844 was allowed for franchise value. (See Electric Railway
Section of the Commercial and Financial Chronicle, May 22, 1915, p. 31.)
' Poor's Manual of Public Utilities (1915), pp. 862-64, and Electric Railway Section
of the Commercial and Financial Chronicle, May 22, 1915, p. 31.
* Information from dealers. The company is having made, for the Michigan Rail-
road Commission, an appraisal of its property.
' Poor's Manual, pp. 1894-97 and 2252, and Railway and Industrial Section of
the Commercial and Financial Chronicle, June 26, 1915, pp. 147-48, and dealers'
circulars.
' Poor's Manual of Public Utilities (1915), pp. 1099-1100, and Railway and Indus-
trial Section of the Commercial and Financial Chronicle, June 26, 1915, p. 154.
250 AMERICAN AND FOREIGN INVESTMENT BONDS
for the needs of the corporation. Modem practice favors an author-
ized issue large enough to take care of all the legitimate future needs
of the company, but limits the actual issue of bonds in such a way
as to keep the debt reasonable compared with the value of the prop-
erty and otherwise make secure the loan. This enables the corpora-
tion to finance on a satisfactory basis reasonable extensions of its
plant and service, and at the same time it protects investors.^ In
general, it may be said that the financial plan of a public-service
corporation should be at one and the same time broad, flexible,
and firm.
One thing more remains to be said. The prices of public-service
corporation bonds during the past ten or fifteen years, like the
Prices o{ ublic- P'^^^^ °^ ^^ Other bonds, have shown a considerable
service corpo- decline. This decline has been much less in the
ration bonds r tv • ^' i. j i_
case of pubhc-service corporation bonds, however,
than it has been in the cases of state, municipal, and railroad
bonds. Even since the war, some of the very strongest public-
service corporation bond issues, like New York Telephone 4^ per
cents, Cleveland Railway 5 per cents, and Detroit Edison 5 per
cents, are selling near the highest prices at which they have ever
sold.^ This is a recognition on the part of investors of the vari-
ous features of strength and stability which we have tried to point
out in this chapter.
As a final word, we would say that the issue of
Final test is ii. • a" u j -l j j.
willingness of pubuc-service corporation bonds based on a property
to tfke aT ^^^ busmess which the bondholders would be glad to
th°^b '*d ^°' take, if necessary, for the bonds is the issue which
investors should be willing to buy.
' For further elaboration of this idea, see Stone & Webster, Public Service Journal,
August, 1914, pp. 99-106.
2 Some of the less well-secured bonds, on the other hand, and bonds on some of the
smaller properties have shovm since the beginning of the war a considerable decline.
CHAPTER Vn
INDUSTEIAL BONDS
Industrial bonds, as the term will be used in this chapter;
comprise bonds of manufacturing and trading con- Definition o{
cems iadustrial bonds
The issue of industrial bonds is a development mostly of the past
fifteen years. The very existence of a form of industrial organiza-
tion suitable for public financing is comparatively origin and
recent. In the early history of this coimtry, business onndusTriaf
combinations took the form of partnerships.^ Not <:o°«™s
until 1811, when the New York Legislature passed a General Incor-
poration Act, did the movement for carrying on business by means
of the corporation attain any importance.* This act was followed
by similar legislation in other States.^ At the beginning of the nine-
teenth century, there were in America probably not more than one
hundred corporations — of which at least one half were in Massa-
chusetts. By 1840, corporations had multiplied "with a flexibility
and variety previously unknown." * Among the earliest industrial
corporations of importance later, were the Standard Oil Company
of Ohio ^ organized in 1870, the Westinghouse Electric and Manu-
facturing Company * incorporated in 1872, and Swift & Company,^
' Robert L. RajTnond, in Barvard Law Renew, vol. xvi, p. 80.
2 Laws of New York 1813, vol. i, p. 245. (34th Session, chap. Lxvn, passed March
22, 1811.) The first business corporation in the United States, however, was chartered
in Pennsylvania in 1768: "The Philadelphia Contributionship for Insuring Houses
from Loss by Fire." {Laws of Pa. chap, dlxxvi.) See Hanard Law Review, vol. n,
p. 165.
' Public Acts of Connecticut 1836-43, chap. Lxili, p. 49, approved June 10, 1837.
Laws of Michigan 1837, no. cxxi, approved March 22, 1837. Until 1851, no corpora-
tion could be organized in Massachusetts without a special act of the legislature. A
general law governing the organization and conduct of corporations created by special
act was passed in 1808. {Stats. 1808, chap. 65.) See Report of the Committee on the
Corporation Laws (1903), p. 16. P. F. Hall, The Massachusetts Business Corporation
Law of igo3 (Boston, 1908), p. i.
* Francis Lynde Stetson, in Atlantic Monthly, vol. ex, pp. 31-32.
' Poor's Manual of Industrials (1913), p. 1615.
' Ibid. (1914), p. 1112. ' Jbid. (1914), p. 955-
252 AMERICAN AND FOREIGN INVESTMENT BONDS
incorporated in 1885. The combination in one form or another of
the interests of individual corporations was a natural step from this.
Between 1899 and 1902, the movement attained large proportions.
During this period the American Can Company, the American
Woolen Company, the International Harvester Company of New
Jersey, the United Fruit Company, and the United States Steel
Corporation ^ were formed by combining the business of many
other corporations. Such imits as these were large enough to need
financial assistance from the public and important enough to appeal
to the public with chance of success. In 1910, according to Poor's
"Manual of Industrials," there were outstanding for the account
of manufacturing and miscellaneous companies bonds amoimting
to $2,585,694,207 and stock amoimting to $8,233,035,721, a total
capitalization of $10,818,729,928.^
In discussing industrial bonds, the first great difference which
strikes one between such bonds and practically aU other classes of
corporation bonds is the greater degree of fluctuation
nature of "toe ^ the business: that is, whereas the gross business of
brmanufacto- steam railroads is likely to fall off in periods of de-
ing and trading pression f rom five to fifteen per cent and the business
concerns '^ ^
of street-railway, gas, or electnc hght and power
concerns varies in times of general depression from a small de-
crease to an increase, say, between five and ten per cent, the pro-
fits of industrial concerns at such times are likely to show a decline
often of between twenty and fifty per cent. We give in the tables
on pages 253-55 the item corresponding most nearly to net earn-
ings of some of our leading industrial concerns engaged in many
different kinds of business for the years 1903 and 1904, 1907 and
1908, and 1913 and 1914, together with percentage of change.'
The total period between 1903 and 1914 is too short to be conclu-
sive or to be much more than an indication as to the fluctuation in
any given business. Owing to the fact that very few of our large
industrial concerns reported earnings much before 1903, it has been
thought hardly worth while to go back of that date. An examina-
• For organization of above corporations see Poor's Manual of Industrials (1914),
pp. 33, 102, 1008, 1041, 1296.
• Ibid. (1910), Introduction, p. x.
• For combined table showing percentage of change in net earnings for the three
periods, see Appendix, pp. 308-309.
INDUSTRIAL BONDS
253
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INDUSTRIAL BONDS
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256 AMERICAN AND FOREIGN INVESTMENT BONDS
tion of the above gains or losses in net earnings during periods of
depression shows that it cannot be assumed that any given concern
always will show a falling-off in earnings at such times. The per-
formance of any given company depends much on the management
and initiative shown. It is to be noted, however, that the United
States Steel Corporation in all three periods showed a falling-off in
net earnings of over thirty per cent; that the General Electric Com-
pany showed a substantial decrease in earnings in all three periods;
that the American Woolen Company showed a loss in net profits in
1908 of over sixty-two per cent, and a change in 1914 from a net
loss of $677,685 to net profits of $2,788,602; and that the American
Locomotive Company showed a fluctuation in net earnings from a
gain of over twelve per cent in 1904 to a loss of over sixty-two per
cent in 1914. These figures show the extremely fluctuating nature
of the business of manufacturing and trading concerns.
Another very important difference between industrial and other
corporation bonds is the highly competitive nature, in most cases,
Competitive of the business. The facts that no right of way, such
busings done by ^^ ^ steam railroad requires, and no franchise, such
such concerns ^s a street-railway, gas, or electric light and power
company is likely to require, are necessary for the creation and
operation of an industrial concern, — together with the fact that
an industrial concern can operate in an abnost limitless field, —
make, as a rule, the nxunber of industrial concerns engaged in any
one business and competing with each other directly much greater
than the number of steam railroads, and, stiU more, public-service
corporations, so competing. Under the regulation of rates by the
Interstate Commerce Commission, railroad competition is drifting
toward competition between sections of the country rather than
between individual railroads; and competition between public-
service corporations under the regulation of state commissions
gradually is passing away. While industrial concerns are subject
to a considerable measure of pubUc control, the governing factor in
their existence is likely always to be competition.
Owing to the above conditions, the management of industrial
concerns is a matter of far greater relative importance than the
management of steam railroads or of public-service corporations
— especially from the point of view of the safety of their securi-
INDUSTRIAL BONDS 257
ties. Where an entirely new business can be started without any
great delay and where conditions of keen competi- q^^ manage-
tion are likely to prevail, good or bad management gf^^t^e^^ost
is pretty nearly the whole story. ^ Valuable and efl&- important
cient plants, large working capital, control of patented safety of in-
articles or of some necessary raw material, all are highly "^"^^"^ ''°"^^
important and may be of great assistance in taking a corporation
through a time of difl&culty; but imless the plants are used wisely,
economically, and profitably by the management, they may have
very little value for any other purpose and may be rendered almost
useless by the competition of another concern that has as good or
better plant facilities and more efl&cient management, and the most
impressive assets as well as other advantages may be dissipated
under poor management.
Owing to the fact that the management of industrial concerns
may change at almost any time, the financing of such concerns
should be and usually is considered in a different light q^^^^ question
from that either of steam railroads or of public-service whether com-
^ , petitive manu-
corporations. It is a grave question whether strictly facturfng or
.. ,. 1. Ill trading con-
competitive manuf acturmg or trading concerns snouid cems should
be bonded at all. In the minds of many people, pubUc ^ °° ^
financing through stock alone, either preferred or common, or
through one class of stock only, is more legitimate and more satis-
factory than creating bonded debt.
In the cases of industrial concerns controlling important and
valuable patents, — such as the General Electric Company, — or
in the cases of concerns controlling a large amount of q^^^^^j ^j
some valuable natural resource like coal, iron ore, valuable pat-
or phosphate rock, — such as the United States Steel valuable natural
Corporation or the American Agricultural Chemical ll^e'SZnt ot
Company, — or concerns owning a large amount of f^^J,?\"'f '^^^
valuable real estate, — such as Swift & Company, — poper basis
, , , , , ... tor bonding'
the creation of bonded debt may seem more legiti-
mate and more expedient.^
1 Professor Dewing, after an examination of thirty-two industrial reorganizations,
says " No business ever developed into a conspicuous success or a conspicuous failure,
except through the ability or lack of ability of men." ((Corporate Promotions and
Reorganizations [Cambridge, 1914], P- 3-)
' In certain kinds of business, sometimes called specialty business — like that of
2S8 AMERICAN AND FOREIGN INVESTMENT BONDS
Even in these cases, however, and certainly in all ordinary corn-
Amount of petitive industrial concerns, the amount of plant
plant and of asscts compared with the amount of debt should be
quick assets *^
compared with very much greater than in the case either of steam
greater than in Tailroads or of public-scrvice corporations. Further-
stelmraiiroads more, there should be in almost every case a large
°5°JP"^'!'^" amoimt of net quick assets — that is, cash, bills
service cor- ^ ' '
porations receivable, or marketable securities.
Industrial ^ ahuost evcry case, moreover, it is wiser to have
be'issued°in'* an industrial bond issue shaped up either with a
serial form or strong sinking-fund or else as a serial issue, so that
strong sinking- a reasonable proportion of the debt will be retired or
"° provided for each year.
The question that we have discussed in previous chapters in the
cases of steam railroads and of public-service corporations — the re-
Relation of lation of such concerns to the public — has reached in
coSlmsto ^^ case of industrial concerns an interesting stage of
the public development. What is the relation of our great manu-
facturing and trading concerns to the pubhc? If such concerns are
to issue bonds, it is highly important to know their general status.
Do they exist legally? Do they carry on their business in conform-
ity with law and with good business usage? Are they subject to
interference on the part of the Government or to especially destruc-
tive competition? On what facts and conditions does their status
depend? In the following pages we will attempt to outline or sug-
gest possible answers to these questions.
It may make this phase of our subject clearer if we outline the
origin and growth of the so-caUed " trust problem." As stated ear-
Historic forms lier in this chapter, business combinations in the
andori^^Sof the United States first took the form of partnerships.
trust question Then, imder the authority of satisfactory corporation
laws in New York, Massachusetts, Michigan, and other States,
business began to be organized in the form of corporations. Subse-
quently there appeared these forms of combination: —
(i) The gentlemen's agreement.
This was usually an informal arrangement to maintain prices
Quaker Oats, Royal Baking Powder, or Baker's Chocolate — a well-established trade-
mark, built up through advertising, is an asset of great value, but hardly of a kind
suitable for bondiog.
INDUSTRIAL BONDS 259
and sometimes to regulate production, and was illustrated in the
cases of the United States Leather Company, the Glucose Sugar
Refining Company, the National Cordage Company, and the
United States Shipbuilding Company.'
(2) The pool.
Under this plan several concerns engaged in a similar business
agreed to divide the territory among themselves, to regulate the
seUing price of their commodity, and generally to establish a com-
munity of interest. This form of combination was illustrated in
the cases of the glucose, cordage, and steel business.^ It was finally
held to be illegal,' and became as far as known practically non-
existent.
(3) The strict or true trust.
Here the several properties intended to be combined were trans-
ferred to individuals as trustees, who issued certificates of bene-
ficial interest. The trustees managed the business of the several
combined properties and paid dividends on the certificates issued.
Examples of this form of organization were the old Standard Oil
Trust, the Sugar Trust, the Whiskey Trust, and the National Cor-
dage Association.^ This form of organization also was held to be
yiegal,^ and practically passed out of existence.*
(4) The large corporation — often in the form of a holding company.
The prohibition of pooling and the illegaUty of true trusts had
the effect of driving practically all "big business" into the cor-
porate form.^
This is the origin of what has loosely but commonly been called
the "trust question."'
There are certain obvious and legitimate advantages of combi-
Economic nation, or perhaps we may say of great size. Among
t^mbiSnir these may be mentioned: -
of great size (j) Ability to handle large orders.
(2) Ability to buy in large quantities and therefore more cheaply.
> Corporate Promotions and Reorganizations, p. 519. * Ibid., pp. 76, 114, 520.
' United States v. Addyston Pipe & Steel Co., 175 U.S. 211.
* Corporate Promotions and Reorganizations, pp. 116-17.
' People V. The North River Sugar Refining Co., 121 N.Y. 582; State v. Standard
Oil Co., 49 Ohio St. 137.
• Report of Industrial Commission, vol. xrx, p. 607.
' Ibid., vol. xni, p. 6. It is interesting to note that the cordage industry passed
through all four forms of organization. (See Dewing, Corporate Promotions and Reor-
ganizations, p. 518.)
8 For above account see Robert L. Raymond in Harvard Law Remew, vol. xvi, pp.
80-81; Francis Lynde Stetson in Atlantic Monthly, vol. ex, pp. 31-32; and Dewing,
Corporate Promotions and Reorganizations, pp. 518-21.
26o AMERICAN AND FOREIGN INVESTMENT BONDS
(3) Ability to sell in large quantities and therefore at a smaller
percentage of profit.
(4) Ability to utilize waste.
(s) Ability to save charges of transportation by shipping from
the plant nearest in location to the consumer.
(6) Ability to specialize labor.
(7) Opportunity for experimentation.
These are what may be called the economic advantages of com-
bination^ or of great size.
There are also advantages of one kind or another in the combi-
nation of competing concerns in some form of organiza-
wastes of tion. Among these may be mentioned: —
compe on ^^^ Saving in the cost of management or superin-
tendence by the elimination of duplicate staffs.
(2) Reduction in the number of salesmen.
(3) Greater control of output and prices.
These may be called some of the savings of the wastes of com-
petition.2
Possible dis- Very often these theoretical advantages are offset
f^ge^sS?"* in practice by factors having an opposite effect.
operation For instance: —
(i) Large companies in purchasing a great amount of raw ma-
terial sometimes push the price up against themselves.
(2) Large concerns often are less able to avoid over-production
in a falling market.
(3) Heavy investment in specialized machinery sometimes makes
a large concern peculiarly susceptible to changes in trade
conditions.
(4) The combination often is imwilling to change its methods
of production or distribution in accordance with improve-
ments in technique.'
To this class of difficulties may be added: —
(i) The unwieldy size of some combinations has made almost
impossible the obtaining of management able to cope with
such a large situation.
(2) There is likely to be too great diffusion of responsibility in
the management of very large units.
' See Raymond in Harvard Law Review, vol. xvi, pp. 82-83.
' Ibid., pp. 83-84. _ 'See Dewing, pp. SSS^^i and 364-63.
INDUSTRIAL BONDS 261
(3) There is usually a lack of acquaintance on the part of the
management with individual employees.
(4) There is likely to be a lack of loyalty or single-mindedness on
the part at least of some of the officers.
(5) There is likely to be a lack of attention to the laborious parts
of the business by higher officials.
(6) The methods of marketing the product may be too mechan-
ical.
(7) There may be prejudice on the part of customers against
improved methods of conducting the business.
(8) There may be prejudice on the part of the customers against
"trusts."
(9) The combination is likely to be susceptible to political anci
legislative attacks and sometimes to blackmail.*
In actual practice, the disadvantages of combination or of large
size often have more than offset the advantages.
Such concerns as the Standard Oil Company, the American Brass
Company, and the American Radiator Company have been able
to evolve management which has given them in prac- Successful and-.
tice all the advantages of large-scale operation ; on the iSge-scaie"*
other hand, other concerns, some of which we shall operation
discuss later in this chapter, seem to have been handled in such a
way as to develop most of the disadvantages and very few of the
advantages of large-scale business. It is interesting if not wholly
significant that in a time of general depression, such as the latter
part of 1914 and the early part of 1915, the United States Steel
Corporation showed record low earnings, whereas the Bethlehem
Steel Corporation, under the personal management and" initiative
of Mr. Schwab, showed the largest net earnings in its history.
Neither the advantages nor the disadvantages of combination
or of size should be confused with what may be called Distinction
monopoly control. Monopoly control means the between ad-
power to control the situation — the power to dictate advantages of
,,, ,.1 i/-ji • r combination or
terms to the laborer and the power to fix the price of size and mono-
goods to the consumer. Briefly, it is the power to do ^"'^ '^°^^'°^
as one pleases.^
1 See Dewing, pp. SS8-62, and 564-65.
' See Robert L. Raymond in Harvard Law Reniew, vol. xvi, pp. 82-84.
262 AMERICAN AND FOREIGN INVESTMENT BONDS
Desire (i) to secure the advantages of size, (2) to save the wastes
of competition, and (3) to secure monopoly control, have been the
Motives for three leading reasons for the combination of industrial
combination conccms.*
Advantages of K there IS to be combination, there are many
fo^T^rgan- advantages in combining in the form of a corporation,
ization Jq g. Corporation: —
(i) Many persons are able to act as a single legal entity.
(2) There is continuity of existence.
(3) The liability of stockholders is limited in amount.
(4) There is ability to raise a large capital because of the lim-
ited liability and the convenience of transferring evidence
of ownership or stock certificates.
(s) Actual management may be entrusted to a small body of men
usually called the directors.
The corporation is the only known form of organization in which
aD these advantages exist together.''
The combining in the form of a corporation immediately places
the corporation imder possible public control; for the corporation
The corpora- derives its very existence from the public' If a given
to°pubUc''^^'^* corporation is engaged in interstate commerce, — and
control most large corporations are, — it becomes subject not
only to state, but to federal control.
Except in a very limited way, this control was not exercised in
any form by the Federal Government until 1890. The development
of great combinations of capital in the form of cor-
the Sherman porations, — coinddcnt with an almost phenomenal
nu- rust aw gj.Q.^,^ jjj population and resources in the United
States, — together with a growing fear on the part of the people of
the economic and social evils possible under the circumstances, led
to the enactment in i8go of the so-called Sherman Anti-Trust Law.*
The provisions of this law later were made applicable specifically
* Another reason often has been the desire of promoters or bankers to make a profit
out of the promotion of the combination or the dealing in its securities.
' See Harvard Law Review, vol. xvi, p. 92. Some people would except voluntary
associations from this statement.
• See Williston on "History of Law of Business Corporations before 1800," Harvard
Law Review, vol. n, p. 112.
« Act July 2, 1890 (26 Stat. L. 209).
INDUSTRIAL BONDS 263
to imports from any foreign country,^ as well as to foreign and
interstate commerce as a whole.
The important provisions of the Sherman Anti- teading pro-
Trust Law are as follows: — visions of the
Sbennan Anti-
Section i. Every contract, combination in the form of ™^ ^^
trust or otherwise, or conspiracy in restraint of trade or commerce
among the several States or with foreign nations is hereby declared
to be illegal. (Such acts are made criminal and penalties are pro-
vided.)
Section 2. Every person who shall monopolize or attempt to monopo-
lize, or combine or conspire with any other person or persons to monop-
olize any part of the trade or commerce among the several States or
with foreign nations shall be deemed guilty of a misdemeanor. . . . (Pen-
alties are provided.)
These provisions remain in force to-day. Until recently, this
was the statute under which all federal suits against alleged illegal
combinations in restraint of trade were brought.
How has this law worked in practice? To what extent has it been
enforced? How has it been interpreted by the United States Su-
preme Court? Are its provisions as now interpreted t^ . .
wise or unwise? The answers to these questions will Sherman Law
lead us far in estimating the present status of great
industrial corporations in their relation to the public.
The Sherman Anti-Trust Law has been enforced intermittently,
spasmodically, and at times almost arbitrarily. Under President
McKinley, it was hardly enforced at all; under Presi- Enforcement
dent Roosevelt, it was enforced, it has been charged, °^ ^^^ '^'^
against his enemies and not enforced against his friends; under
President Taft, it was enforced apparently impartially, but under
a conception of the Attorney-General as to what constituted a
dangerous share of the total business in any given industry. All
efforts at enforcement have been confined to a comparatively few
cases, owing to the physical impossibility of instituting court pro-
ceedings — the only method of enforcement provided — against
any large number of offenders covered by the act.*
1 Act August 27, 1894 (28 Stat. L. 570), as amended by Act February 12, 1913
(37 Stat. L. 667).
' See J. H. Benton, "The Sherman or Anti-Trust Act," reprinted from Yale Lam
264 AMERICAN AND FOREIGN INVESTMENT BONDS
The early interpretation of the Sherman Anti-Trust Law by
Early interpre- the United States Supreme Court established these
iawTy°thf principles:-
Supreme Court ^^.^ ^y. combination which directly restrains inter-
state trade is illegal.
(.2) A holding company is a combination.
(3 )Restraint of trade means any restraint and not merely an unrea-
sonable restraint.
(4) Direct restraint of trade means restraint in some degree sub-
stantial,
(s) Trade is restrained by the ending or limiting of competition among
the members of the combination as well as when the business of
others is injured.
(6) The mere power to restrain trade is sufficient to bring a combina-
tion within the act.
(7) This power need not be broad enough to cover the whole country
or even a large part.*
Until recently, this drastic and sweeping interpretation of the
Sherman Anti-Trust Act was the law.
In its most important phase the law, as thus laid down by the
United States Supreme Court, was a departure, not only from the
This interpre- apparent intention of Congress when passing the Sher-
parTure from ^Qan Act,^ but also from a well-established rule of the
common law commou law. This rulc was that "restraint of trade
or commerce " meant a restraint that was unreasonable.' In two of
the cases in which a majority of the court held the Sherman Act
applicable to any direct restraints of trade, opinions were delivered
Journal, March, 1909, pp. 7, 13, 14. This article gives a complete list of suits in equity
brought by the Attorney-General under the Sherman Act up to January i, 1909.
1 Robert L. Raymond in Harvard Law Review, vol. xxrn, p. 373. See United States
V. E. C. Rnight Company, 156 U.S. i; United States b. Trans-Missouri Freight Asso-
ciation, 166 U.S. 290; United States v. Joint Traflic Association, 171 U.S. 505; Hop-
kins V. United States, 171 U.S. 578; Anderson v. United States, 171 U.S. 604;
Addyston Pipe & Steel Co. v. United States, 175 U.S. 21; Montague v. Lowry, 193
U.S. 38; Northern Securities Co. v. United States, 193 U.S. 197; Swift v. United
States, 196 U.S. 375; Harriman v. Northern Securities Co., 197 U.S. 244; Board of
Trade of Chicago v. Christie Grain & Stock Co., igS U.S. 236; Loewe v. Lawlor, 208
U.S. 274; Continental Wall Paper Co. v. Voight & Sons, 212 U.S. 227; American
Banana Co. v. United Fruit Co., 213 U.S. 347. The Sherman Law never has been
interpreted by the Supreme Court as regards foreign commerce. (Public Service
Regulation and Federal Trade Reporter, January i, 1915, p. 12.)
' See Congressional Record, vol. xxi, part 4, pp. 3146, 3148.
' See William F. Dana in Harvard Law Review, vol. xvi, pp. 179, 180.
INDUSTRIAL BONDS 265
insisting on the old common-law meaning, that is, unreasonable
restraints. 1
The above interpretation could not last. It made illegal every
combination directly restraining interstate commerce, whether
such restraint was reasonable or unreasonable. It .
made practically every business man in the United tation could
States liable to criminal prosecution. If strictly and °° ^
imiversally enforced, which it was not and could not be, it would
have brought the business of the United States as a whole to a
standstill.^
In later decisions of the Supreme Court, the law in „ .
... , , , New mterpre-
substance if not m words was changed. These deci- tation in the
sions were in the famous Standard Oil and American andAmerican
Tobacco cases.' In these cases, the court held: — '^°'''-'="' "^^
(i) That the Anti-Trust Act prohibited unreasonable or undue re-
straint of interstate trade or attempts to monopolize the same in
any and every form.
(2) That trade is unduly restrained (a) by agreements which lessen
competition among those agreeing to an extent which reasonably
may be thought to injure the competing or consuming pubUc; (b)
by acts, combinations, or mere conditions of existence which ref>-
resent a purpose to acquire monopoly control.
(3) That the Standard Oil Company of New Jersey and the American
Tobacco Company, as shown conclusively by the purposes and
results of their conduct, were engaged both in unreasonable or
imdue restraints of interstate trade and also in attempts to monop-
olize the same; that therefore they were illegal under both the first
and second sections of the Sherman Act.*
In these decisions the Supreme Court practically reestablished
the common-law nUe iu regard to restraint of trade.
In reaching this conclusion, the court took as the principal test
'■ See WMte, J., in United States v. Trans-Missouri Freight Association, 166 U.S.
2go; Brewer, J., in Northern Securities Co. v. United States, T93 U.S. 197.
2 See J. H. Benton, from Yale Law Journal, March, 1909, p. 15. According to
Charles R. Van Hise, the early interpretation of the Sherman Act took us back to the
principles which prevailed in England from the Middle Ages to 1844. {Public Service
Regulation, February 15, 1915, p. 99-)
• Standard Oil Company of New Jersey v. United States, 221 U.S. i (rgii) ; United
States V. American Tobacco Company, 221 U.S. 106 (1911).
* See Robert L. Raymond in Harvard Law Redew, vol. xxv, pp. 35-36, and in
Journal of Political Economy, vol. xx, p. 316.
266 AMERICAN AND FOREIGN INVESTMENT BONDS
of illegality the injury of the competing or consuming public. It
, , held that interference with the right of others to trade
Grounds oi • • • j j i
dedsions in was an imdue restraint; it considered that oppression
andAmerican of the public and the use of unfair methods of com-
Tobacco cases petition constituted attempts at monopoly. In the
American Tobacco case, the court distinctly stated that it did not
base its decision (i) on mere size, (2) on the mere fact of combina-
tion, (3) on the mere extent of control over the trade. In both cases
the court took its stand on the broad ground: "Is this a case where
the general public is injured?" The subject of attack was not
the principle of combination, but monopoly control and unfair
methods.^
The evidence in the Standard Oil case showed that the company
had received from railroads rebates and discriminations; that it
Evidence on had made contracts in restraint of trade; that it had
decUions^ indulged in local price-cutting, in spying on competi-
were based ^ors, and in the operation of bogus independent com-
panies.^ The evidence in the American Tobacco case showed that
the company paid for competing concerns prices entirely out of
proportion to actual valuations; that in many cases it abandoned
and dismantled plants purchased; that in practically every case of
purchase of a competing concern it forced an agreement from that
concern not to engage in the tobacco business for a long term of
years; that it lowered at times the price of its product below cost
to kill off competition; and that generally it engaged in competition
of a sort which resulted in driving others out of business or com-
pelling them to enter the combination. The methods by which
the combination was brought about and control maintained were
secretive and misleading, showing a conscious wrongdoing with
intent to obtain mastery.'
standard ou "^^^ Standard Oil and American Tobacco decisions
and American brought the interpretation of the Sherman Anti-Trust
Tobacco cases " , *
brought inter- Act to a practicable, and mteUigent basis. They were
Sherman Act to in cvcry scuse of the word "reasonable" decisions,
a workable basis 'j-jjgy permitted combinations formed to secure the
1 Hanard Law Reoiew, vol. xxv, pp. 35-53 • For the announcement of similai
principles, see the recent decision of the English Lord Chancellor in the Salt Monopoly
case. {Public Service Regulation, February 15, igij, p. 102.)
2 Harvard Law Review, vol. xxv, p. 35. ' Ibid., pp. 46, 49.
INDUSTRIAL BONDS 267
economic benefits of size or to save the wastes of competition, but
they refused to permit combinations formed to secure monopoly
control — that is, formed to do as the combiaations pleased with
production, wages, and prices. They refused to permit such com-
binations by refusing to permit unfair methods.
Combinations formed and capitalized on the basis of monopoly
control cannot endure if competition is given a fair chance. They
are inherently imsotmd. Such combinations owe their „ .
, . , , ... If given a fair
success, perhaps even their existence, to the abmty to diance compe-
interf ere with the rights of outsiders — in other words, feat monopoly
to the use of unfair methods of competition. To pay ""^^°^
dividends on a capitalization representing monopoly control, a
combination must lower wages or raise prices. The truth of this
will be shown when we take up later in this chapter certain indus-
trial failures. These failures, where they were not due to inefficient
management, were due to inability to maintain monopoly control
in the face of actual or potential competition. To make potential
competition effective is the basis of a true solution of the trust
problem.^
Potential competition may be made effective: (i) By giving alien
capital a chance to know all the facts — that is, by publicity; (2)
by insisting that combinations shall fight competition
by fair methods only; (3) by preventing the abuse of under wWch
monopoly during the period necessary for potential comprtWon
competition to become actual competition — that ^y be made
is, by some form of government inspection or super-
vision.^ These conditions will enable outsiders to compete.
This solution of the problem has been attempted recently in
the passage by Congress of two laws: * Enactment of
(1) "An Act to supplement existing laws agamst un- Federaf Trade
lawful restraints and monopolies and for other La^°^°°
purposes"; approved October 15, 1914, and com-
monly known as the "Clayton Anti-Trust Act."
(2) "An Act to create a Federal Trade Commission, to define its
* Harvard Law Renew, vol. xxv, p. 56; Ibid., vol. xvi, pp. 88-93; and Dewing,
Corporate Promotions and Reorganizations, p. 558.
' Harvard Law Review, vol. xvi, pp. 88-93.
■ Acts of 63d Congress, igi^t4. Stats. L., part i, p. 730, and Acts of 63d Con-
gress, igi3-i4. Stats. L., part i, p. 717.
268 AMERICAN AND FOREIGN INVESTMENT BONDS
powers and duties, and for other purposes"; approved September
26, 1914.
These two laws were considered in connection with each other.
Leading pro- The leading provisions applicable to industrial
cflyton Antt concems of the Clayton Anti-Trust Act are as
Trust Law folloWS: —
Section 2. That it shall be unlawful for any person engaged in
commerce, 1 in the course of such commerce, either directly or in-
directly to discriminate in price between different purchasers of com-
modities, which commodities are sold for use, consumption, or resale
within the United States or any Territory thereof or the District of
Columbia or any insular possession or other place under the jmisdic-
tion of the United States, where the effect of such discrimination may
be to substantially lessen competition or tend to create a monopoly in
any line of commerce: Provided, That nothing herein contained shall
prevent discrimination in prices between purchasers of commodities on
account of differences in the grade, quaUty, or quantity of the commod-
ity sold, or that makes only due allowance for difference in the cost of
selling or transportation, or discrimination in price in the same or differ-
ent communities made in good faith to meet competition: And provided
further, That nothing herein contained shall prevent persons engaged in
selling goods, wares, or merchandise in commerce from selecting their
own customers in bona fide transactions and not in restraint of trade.
Section 5. That it shall be unlawful for any person engaged in com-
merce, in the course of such commerce, to lease or make a sale or contract
for sale of goods, wares, merchandise, machinery, supplies or other com-
modities, whether patented or unpatented, for use, consumption or
resale within the United States or any Territory thereof or the District
of Columbia or any insular possession or other place under the jvuisdic-
tion of the United States, or fix a price charged therefor, or discount
from, or rebate upon, such price, on the condition, agreement or under-
standing that the lessee or purchaser thereof shall not use or deal in the
goods, wares, merchandise, machinery, supplies or other commodities of
a competitor or competitors of the lessor or seller, where the effect of
such lease, sale, or contract for sale or such condition, agreement or
understanding may be to substantially lessen competition or tend to
create a monopoly in any line of commerce.
Section 7. That no corporation engaged in commerce shall acquire,
directly or indirectly, the whole or any part of the stock or other share
capital of another corporation engaged also in commerce where the effect
of such acquisition may be to substantially lessen competition between
1 Meaning interstate or foreign commerce.
INDUSTRIAL BONDS 269
the corporation whose stock is so acquired and the corporation making
the acquisition, or to restrain such commerce in any section or commim-
ity, or tend to create a monopoly of any line of commerce.
No corporation shall acquire, directly or indirectly, the whole or any
part of the stock or other share capital of two or more corporations en-
gaged in commerce where the effect of such acquisition, or the use of such
stock by the voting or granting of proxies or otherwise, may be to sub-
stantially lessen competition between such corporations, or any of them,
whose stock or other share capital is so acquired, or to restrain such
commerce in any section or community, or tend to create a monopoly of
any line of commerce. . . .
Section 8. That from and after two years from the date of the ap-
proval of this Act no person at the same time shall be a director in any
two or more corporations, any one of which has capital, surplus, and
undivided profits aggregating more than $1,000,000, engaged in whole
or in part in commerce ... if such corporations are or shaU have been
theretofore, by virtue of their business and location of operation, com-
petitors, so that the elimination of competition by agreement between
them would constitute a violation of any of the provisions of any of the
Anti-Trust Laws.'
These provisions are the gist of the law.
Other important sections applicable to industrial concerns are:
one providing that any violation of the penal provisions of the
Anti-Trust Laws by a corporation shall be deemed ^,, .
, , , other impor-
also a crime of the individual directors, oflEicers, or tant provisions
agents who have authorized such violation; ^ one industrial
providing that any person, firm, corporation, or asso- '^°°'=*™=
ciation shall be entitled to sue for and have injunctive relief against
threatened loss or damage through a violation of the Anti-Trust
Laws; ' and one vesting authority to enforce sections 2, 3, 7, and 8,
in so far as they are applicable to industrial concerns, in the Federal
Trade Commission subject to review by the courts.^
The Clayton Anti-Trust Act does not do away with any part of
the Sherman Anti-Trust Law of 1890. It amplifies Clayton Act
and supplements that law. In the opinion of ex-Presi- s^£nte^the
dent Taft, it does not, with the possible exception of Sherman Act
the so-called tying provision in the sale of patented articles, enlarge
' The Anti-Trust Laws in the meaoning of this act are: The Sherman Act, portions of
the Wilson Tariff as amended, and the Clayton Act.
* Section 14. ' Section 16. • Section 11.
270 AMERICAN AND FOREIGN INVESTMENT BONDS
the field of illegal and criminal effort in respect to restraints of
interstate commerce or monopolies. In other words, all the leading
prohibitions concerning restraints of trade in the Clayton Act —
(i) discriminations in price in sales of goods, (2) sale of goods pat-
ented or impatented on condition that the purchaser shaU not deal
in or use the goods of a competitor, (3) acquisition of stock by one
corporation in another, and (4) acquisition of stock by one cor-
poration in two other corporations, when the effect of any one of
these four acts may be substantially to lessen competition, restrain
interstate commerce, or tend to create a monopoly — with the
possible exception above noted, were covered by the Sherman Act
as interpreted by the Supreme Court. The new law is therefore
chiefly declaratory. ^ It has been pointed out, however, by ex-
Attomey-General Wickersham that the meaning of the phrase, "to
substantially lessen competition," used in sections 2, 3, and 7 of the
Clayton Act, remains to be interpreted by the courts, just as the
phrase, "restraint of trade," in the Sherman Act has been inter-
preted.^
The Clayton Act expressly exempts from the prohibitions against
price discriminations and tying contracts, goods not intended for
Clayton Act "use. Consumption, or resale within the United
Ta^t^^A States" — in other words, exports.* The Sherman
to exports j^q^ (joes not do so, but makes illegal every contract
or combination in restraint of trade "among the several States or
with foreign nations." * It has been thought desirable that groups
of American manufacturers should be permitted to join together
(i) in the maintenance of joint exhibits of their products in foreign
markets; (2) in conducting cooperative sales campaigns; and (3) in
pooling expenses and dividing profits.^ How this will be worked
out remains to be seen.
The prohibitions against stock ownership in competing corpora-
tions apply only to ownership by a corporation. There is nothing
Holding to prevent the ownership by one or more individuals
companies ^f g^jj qj. j^y pg^^j. q{ jj^g gtock of Competing corpo-
rations."
' Public Seroice Regulation, November 1, 1914, pp. 612-13.
» Ibid., January 15, 1915, p. 37. » Sections 2 and 3. * Section i.
' Federal Trade Reporter, March 15, 1915, p. 174.
» See Rush C. Butler and Cornelius Lynda, The Federal Trade Commission and the
INDUSTRIAL BONDS 2/1
The prohibition of interlocking in the case of industrial corpora-
tions applies not to officers or employees, but only to directors.
Opinions have been advanced for and against the interlocking
wisdom of this prohibition. Mr. James J. Hill thinks directorates
the prohibition ridiculous because it "can produce nothing but a
orop of dummy directors." '■ The ideal situation would be preven-
tion, not of interlocking directors in all cases, but of the abuse of
their power. A man should not act as buyer and seller in the same
transaction; but he shoiild be allowed to give the benefit of his
broad experience in certain cases to more than one board of direc-
tors. The only solution of this problem is a sense of honor on the
part of the director, enforced, perhaps, by public opinion.
The personal-guilt clause of the Clayton Act ^ relates to the
penal provisions of the Anti-Trust Laws. It fastens guilt for the
illegal act of the corporation on the individual direc- Personai-
tors, officers, or agents of the corporation. It proceeds suJt clause
on the theory that to stop "joy-riding" it is necessary "to arrest
the chauffeur and not the automobile." '
The right of injunctive relief granted by the Clayton Act to any
person, firm, corporation, or association, against threatened loss or
damage by a violation of anything in the Anti-Trust Machinery of
Laws, is a right hitherto held only by the Govern- eDiaicement
ment.* In many other ways, also, the enforcement of the Anti-
Trust Laws is made more efficient. The benefit of a decree in a
government suit accrues to private litigants, and the time con-
sumed in the government suit is added to the regular period of
three years in determining the time in which a suit may be brought
for the recovery of damages. As in the Sherman Law, any individ-
ual, corporation, or association injured in his business or property by
reason of anything forbidden in the Anti-Trust Laws may sue for
Regulation of Business under the Federal Trade Commission and Clayton Laws (Chicago,
1915), pp. 11-13. In the opinion of Frands Lynde Stetson, holding companies should
be permitted, but minority stockholders should be protected. {Atlantic Monthly,
vol. ex, p. 40.)
1 Federal Trade Reporter, March i, 1915, p. 139.
' Section 14.
' Statement of President Wilson as quoted in the Boston Evening Transcript,
January 14, 1914.
* See State of Minnesota v. Northern Securities Company et al., 194 U.S. 48, and
National Fire-Proofing Co. v. Mason Builders' Association, 169 Fed. Rep. 259.
272 AMERICAN AND FOREIGN INVESTMENT BONDS
and recover threefold damages and costs. ^ The Government, as
imder the Sherman Law, may proceed in equity to prevent and
restrain violations of the Anti-Trust Laws.^
In a general way, the Clayton Act is part of the legislation in-
tended to eliminate the so-called "twilight zone" of legality and
Summary of the illegality. Some people think that in so far as it pro-
ciayton Act hibits Certain definite practices it weakens the Sher-
man Law.' The practices prohibited, however, have been for
many years familiar to business men and have come up again and
again in the courts. It is to be noted that no practice is prohibited
in sections 2,3, and 7 of the Clayton Act, unless the practice shall
have the effect of substantially lessening competition, restraining
interstate or foreign commerce, or tending to create a monopoly.
In the last resort, the law in its terms gives to the Circuit Court of
Appeals and the Supreme Court the discretion which the Supreme
Court took for itseK in interpreting the Sherman Act.
Passed at practically the same time as the Clayton Act, and
considered in connection with it, is the Federal Trade Commission
,^ , Law. This law creates a commission composed of
Fcdcrs.! Trade
Commission five men appointed by the President of the United
States by and with the advice and consent of the
Senate. Not more than three of the commissioners shall be mem-
bers of the same pohtical party. The term of office of each com-
missioner ultimately shall be seven years; but provision is made
for the term of one commissioner to mature each year. Each com-
missioner shall receive a salary of $10,000 a year. The Commission
shall have authority to employ and fix the compensation of such
attorneys, special experts, examiners, clerks, and other employees
as it may from time to time find necessary for the proper perform-
ance of its duties and as may be appropriated for by Congress.
The Commission shall succeed the Bureau of Corporations.^
The Commission is empowered and directed to prevent persons,
partnerships, or corporations, except banks and com-
Prevention of* ., . .. .1,^
unfair methods mon camcrs, from usmg imiair methods of competi-
compe 1 on ^.^^ .^ interstate or foreign commerce. The law says:
"That unfair methods of competition in commerce are hereby
' Section 4. ' Section s-
' See Annalist (New York), April 20, 1914, pp. 488-89. * Sections i, 2, and 3.
INDUSTRIAL BONDS 273
declared unlawful." ^ Whenever the Commission shall have reason
to believe that any person, partnership, or corporation has been
or is using any unfair method of competition in interstate or foreign
commerce, and if it shaU appear to the Commisaon that a proceed-
ing by it in respect thereof would be to the interest of the public,
it shall issue and serve upon such person, partnership, or corpora-
tion a complaint stating its charges in that respect, and containing
a notice of a hearing upon a day and at a place therein fixed at least
thirty days after the service of said complaint. Any person, part-
nership, or corporation may make application and, upon good cause
shown, may be allowed by the Commission to intervene and appear
in said proceeding by coimsel or in person. If, upon such hearing,
the Commission shaU be of the opinion that the method of compe-
tition in question is prohibited by this act, it shall make a report in
writing in which it shall state its findings as to the facts, and shall
issue and cause to be served on such person, partnership, or cor-
poration an order requiring him or it to cease and desist from using
such methods of competition. Until a transcript of the record in
such hearing shall have been filed in a United States Circuit Court
of Appeals, the Commission may at any time modify or set aside,
in whole or in part, any report or any order made or issued by it
under this section.^ The Commission may apply to the United
States Circuit Court of Appeals for the enforcement of its order,
and any party ordered by the Commission to cease from unfair
methods of competition may obtain a review of such order in the
same court. The findings of the Commission as to the facts, if
supported by testimony, shall be conclusive. The court may order
additional evidence taken before the Commission. The court shall
have power to make and enter a decree affirming, modif)dng, or
setting aside the order of the Commission. The jurisdiction of the
Circuit Court of Appeals in this respect shall be exclusive and the
judgment and decree of this court shall be final — except that the
same shall be subject to review by the Supreme Court upon certiorari.
The Commission also shall have authority: —
(i) To enforce, in so far as they are applicable to in- Other powers
, . ■ ^. J o 1! ii and duties
dustnal concerns, sections 2, 3, 7, and 8 of the of the Trade
Clayton Law. Commission
> Section 5. * Section 5.
274 AMERICAN AND FOREIGN INVESTMENT BONDS
(2) To investigate the organization, business, conduct, practices, and
management of any corporation, excepting banks and common
carriers, engaged in interstate or foreign commerce and its relation
to other corporations and to individuals, associations and part-
nerships.
(3) To require corporations engaged in interstate or foreign com-
merce, except banks and common carriers, to file with the Com-
mission annual or special reports or answers in writing to specific
questions.
(4) To investigate, on its own initiative, the manner in which any
final decree against a corporation to prevent and restrain any
violation of the Anti-Trust Acts has been or is being carried out.^
(5) Upon the direction of the President or either House of Congress, to
investigate and report the facts relating to any alleged violation
of the Anti-Trust Acts by any corporation.
(6) Upon the application of the Attorney-General, to investigate and
make recommendations for the readjustment of the business of
any corporation alleged to be violating the Anti-Trust Acts in
order that the corporation may thereafter maintain its organiza-
tion, management, and conduct of business iu accordance with law.
(7) To make pubhc from time to time such portions of the informa-
tion obtained by it hereunder, except trade secrets and names of
customers, as it shall deem expedient in the public interest; and
to make annual and special reports to the Congress and to submit
therewith recommendations for additional legislation; and to
provide for the publication of its reports and decisions in such
form and manner as may be best adapted for public information
and use.
(8) From time to time to classify corporations and to make niles and
regulations for the purpose of carrying out the provisions of this
act.
(9) To investigate, from time to time, trade conditions in and with
foreign countries where associations, combinations, or practices
of manufacturers, merchants, or traders, or other conditions, may
affect the foreign trade of the United States, and to report to
Congress thereon, with such recommendations as it deems ad-
visable.^
(10) To act as a master in chancery in any suit in equity brought by the
Attorney-General as provided in the Anti-Trust Acts.'
* On the application of the Attorney-General, it must make such investigation.
' Section 6. Some people think that this section gives the Trade Commission
authority to act as a tariff board.
• Section 7.
INDUSTRIAL BONDS 275
(ii) To obtain, on the direction of the President, information relative
to any corporation subject to this act from the several departments
and bureaus of the Government and a detail of such officials and
employees as he may direct.'
(12) To have access to, for the purpose of examination, and the right
to copy any documentary evidence of any corporation being inves-
tigated or proceeded against; and to require the attendance and
testimony of witnesses and the production of all such docu-
mentary evidence relating to any matter under investigation.*
Upon the appUcation of the Attorney-General of the United
States, at the request of the Commission, the district courts of the
United States shall have jurisdiction to issue writs of mandamus
commanding any person or corporation to comply with the provi-
sions of this act or any order of the Commission made in pursuance
thereof.'
These, with the prohibition of unfair methods of competition, are
the leading provisions of the Federal Trade Commission Act.
The Federal Trade Commission Act, in addition to furnishing
machinery for the enforcement of the Sherman and Clayton Acts,
itself sets up a new legislative standard — "unfair unfair methods
methods of competition." The question of what are °^ competition
vmfair methods of competition, while not defined in the law,* is
understood in a general way in business practice. The framers of
the law decided that to attempt to define or enumerate unfair
methods of competition in advance would be to leave open oppor-
tunities for evasion and thereby weaken the law. For if only certain
practices are prohibited, the ingenuity of man will invent new ones
which may be just as unfair. Mr. Stevens, of the faculty of Politi-
cal Science of Columbia University, has classified unfair methods
of competition as follows: Local price-cutting; operation of bogus
"independent" concerns; maintenance of "fighting ships" and
"fighting brands"; lease, sale, purchase, or use of certain articles
as a condition of the lease, sale, purchase, or use of other required
articles; exclusive sales and purchase arrangements; rebates and
preferential contracts; acquisition of exclusive or dominant control
* Section 8. ' Section 9. ' Ibid.
* "Unfair competition" has a definite meaning in law — the passing-oflf of one's
goods as those of another. Rathbone, Sard & Co. ti. Champion Steel Range Co., 189
Fed. Rep. 26, 31; 37 L.R.A. (N.S.) 258; W. R. Lynn Shoe Co. v. Aubum-Lynn Shoe
Co., 100 Me. 461; 62 Atl. 499, 5°S' 4 L.R.A. (N.S.) 960.
276 AMERICAN AND FOREIGN INVESTMENT BONDS
of machinery or goods used in the manufacturing process; manipu-
lation, blacklists, boycotts, whitelists; espionage and use of detec-
tives, coercion, threats, and intimidation.' Such methods as the
above. Congress evidently intended to prevent in declaring imfair
methods of competition unlawful. In general, it intended appar-
ently to prevent those methods regarded in good business usage as
unfair and particularly those methods likely to lead to monopoly
— or, to make a still broader generalization, to prevent those
methods of competition harmful to the public. ^ The meaning of
the phrase, however, will have to be interpreted in specific cases by
the Commission and the courts.'
The new Federal Trade Commission has been compared by ex-
President Taf t and others with the Interstate Commerce Commis-
sion. There are many points of resemblance. As the
Comparison oi -^ , , , j^ x ii ji***
Federal Trade interstate Commerce Law declares undue discnmma-
withTnterSate ^^^ ^^^ Unreasonable rates unlawful, so the Trade
Commerce Commission Law declares imfair methods of competi-
Commission . _ ^
tion unlawful. As the former creates a commission to
determine what rates are unduly discriminating and unreasonable,
so the latter creates one to determine what are unfair methods of
competition. Equally inquisitorial powers are conferred on the two
commissions, and similar processes and hearings are provided in
case of alleged violation of the law on the complaint of any one or
on the Commission's own initiative. The Interstate Commerce
Commission, however, has a wider discretion, free from review
by the courts, than has the Trade Commission. The Commerce
Commission not only finds the facts, but exercises in detail the
legislative function of Congress in regulating rates. All that the
courts do in review of action by the Commerce Commission is to
see that it is within the scope and limitations of the general delega-
1 Annalist (New York), October 26, 1914, p. 340.
' President Taft considers unfair methods of competition to include only those
methods and practices the effect and intent of which will bring them within the scope
and condemnation of the first and second sections of the Sherman Act. {Public Service
Regulation, November i, 1914, p. 612.)
' According to the terms of the law, unfair methods of competition are forbidden
to all persons, partnerships, and corporations, except banks and common carriers,
engaged in interstate or foreign commerce (see Section $)• For a discussion of the
treatment of unfair methods of competition in England, France, Germany, and other
countries see H. D. Nims in the Outlook, February 7, 1914, p. 310.
INDUSTRIAL BONDS 277
tion of power and that it does not deprive the carrier of its property
without due process of law — in other words, that it does not con-
fiscate. The function of the Trade Commission also is to find the
facts, but the final decision as to what are fair or unfair methods
of competition will rest with the courts. '
Ex-President Taft also has compared the fimctions of the Trade
Commission ia preventing imfair methods of competition with the
action of a master in chancery. Like a master, the
Trade Comanission finds the facts; but unlike a mas- cerUmVunc-"
ter, the decision of the Trade Commission as to the T™de°Commis-
facts, if supported by legal evidence, is final, whereas f^^^^^^
the decision of a master in chancery as to the facts can Master in
, ,.... 1 ei • 1 r • Chancery
be reversed, if it is contrary to the weight of evi-
dence." '^
In general, the new Federal Trade Commission has been created
to carry on the work of the Bureau of Corporations in investiga-
tions and also to furnish a convenient machinery for General powers
enforcing the Sherman and Clayton Anti-Trust Laws ^ th "xradf
and the prohibition in the Trade Commission Act Commission
against unfair methods of competition. It is a body evidently
intended to use discretion. Its powers are of three sorts: (i) Inquisi-
torial; (2) administrative; (3) quasi-judicial. It can investigate,
except as to financial condition, all corporations engaged in inter-
state or foreign commerce and the relation of such corporations to
private individuals, firms, and associations. It can classify corpo-
rations and ask for information or reports from certain classes and
not ask for such information or reports from other classes. In other
words, it can reduce its investigations to a workable and discre-
tionary basis. In exercising its administrative functions, it must
force compliance with the terms of the Clayton Act and probably
of the Sherman Act. In the matter, however, of filing a complaint
in connection with the use of unfair methods of competition ac-
cording to the Trade Commission Act, the Commission is left the
discretion of bringing an action only in cases where it shall appear
to the Commission that such action will be in the interest of the
public. This is, of course, a very broad discretion. The quasi-
judicial functions of the Commission enable it to act in corrective
1 Pttblic Service Regulation, November i, 1914, p. 613. ' Ibid.
278 AMERICAN AND FOREIGN INVESTMENT BONDS
processes in aid of the courts, in establishing unfair methods of
competition, in providing for the readjustment and reorganization
of corporations under decrees of the courts and in entering consent
decrees in connection with the Department of Justice.
The Trade Commission and the Department of Justice imdoubt-
edly will act in cooperation in enforcing the Anti-Trust Laws.
Relation be- Either the Commission or the Attomey-CJeneral's
Federal Trade °^^^ ^^^ ^^^ independently, of course, in a large field.
Commission It has been suggested by the Attorney-General's office
Department that probably the principal work of enforcing the
of Justice Sherman Act will contmue to be done by the Depart-
ment of Justice, whereas the Trade Commission will act largely
under the Clayton Law and the prohibition in the Trade Commis-
sion Law against imf air methods of competition. The Department
of Justice imdoubtedly will seek the views of the Trade Commission
regarding dissolution decrees against corporations adjudged to be
monopolies. It will also undoubtedly tium over to the Commission
a large number of voluntary complaints that have been sent in dur-
ing the past few years alleging "unfair" practices, but which do not
charge or tend to prove the existence of monopoly. The Attorney-
General's office takes the position that, where cooperation with the
Trade Commission is not ordered by law, such cooperation will
depend entirely on the discretion of the Attorney-General.'
A most important feature of the Trade Commission Act is the
provision for publicity. The Commission can, if it chooses, hold
pubUdty open hearings, and it can make public, except trade
Trade^OTi-''^ secrets and the names of customers, any information
mission Act which it sees fit. This publicity, it has been pointed
out, should have three effects: (i) Where excessive profits by cor-
porations are shown, competition will be encouraged to enter the
field — that is, potential competition will become actual competi-
tion; (2) labor will be in a position to imderstand whether or not it
is being properly paid; and (3) investors will be enlightened as to
the value of their securities.^ In general, the publicity features of
the Trade Commission Law are among its most important provi-
sions. If taken advantage of intelligently and in the proper spirit,
' Federal Trade Reporter, April i, 1915, pp. 207-08.
' Ibid., Marcti i, igiSi p. 157.
INDUSTRIAL BONDS 379
they will go far toward bringing about a solution of the so-called
trust problem and toward enabling investors to appraise the se-
curities of any given corporation in their true hght.
Chairman Davies, of the new Federal Trade Commission, in all
his public utterances lays stress on the fact that the Trade Com-
mission Law will be interpreted not in terms of men- p^,.^ ^j ^^^
ace, but in terms of constructive helpfulness. He calls Trade Com-
• , . , ,_,.. -I 11 mission as out-
attention to the fact that the Conmussion gradually lined by chair-
will come into possession of a vast amount of corre- ""^^ ^"^^
lated information in regard to the industries and business of the
country and that this information, except trade secrets and names
of customers, will be available to Congress and the people. He
calls attention also to the fact that the Commission wiU be in a
position to settle a great many difficulties without htigation. He
refers to the power of the Commission to stop imfair methods of
competition as the power which wiU ktU monopoly in the seed or
cut it off at the roots. For the greatest menace, he says, to the
296,000-odd small corporations in this country is the unfair meth-
ods of competition used by the comparatively small number of
large corporations. The Trade Commission will be in a position,
like the Interstate Commerce Commission, to give continuous
administrative action; the Department of Justice can deal only
with violations of law. Mr. Davies considers the Trade Commis-
sion the greatest safeguard since the Sherman Law for preserving
the independence of sm,aU concerns and keeping open the channels
of trade. If hi§ ideas are followed, the Commission's principal work
will be to bring business into harmony with the law. He hopes that
its work will result in a new era of good feeling. ^
One of the leading framers of the law feels that as time goes on
the corrective work of the Commission will diminish and its con-
structive work will increase.'' Business gradually will ^^^^^ ^^^_
become adjusted to the rulings of the Commission and mission in a
the courts, and business men will set their houses in do^construc-
order. The Commission has the power to investigate "^^ """'^
conditions in foreign countries and to make recommendations
' See PMic Service Regulation, January i, 1915, pp, 6-7; ibid., January is, 1915,
pp. 39-42; Federal Trade Reporter, March i, 1915, pp. 134-36; ibid., April i, 1915, pp.
195-96; Commercial and Financial Chronicle, vol. 100, p. 1551.
^ Senator Newlands, as quoted in Public Service RegtthHon, February i, 1915, p. 70.
28o AMERICAN AND FOREIGN INVESTMENT BONDS
which will aid in the development of our foreign trade. It is in a
position to make rulings and suggestions which may be of im-
mense benefit to general business. At the same time, according
to its declared intention, the Commission will not act as a board of
advice to business men in entering on any given programme. * It
will not and should not place itseK in a position to approve in ad-
vance any given act. As one writer has put it, the board should not
be a body of men to which business men can nm and ask ques-
tions.^ At the same time the commissioners, according to their own
statement, will discuss informally with business men various phases
of their business.' The whole atmosphere surrounding the enact-
ment of the Trade Commission Act, irnhke that which prevailed
at the time of the passage of the Interstate Commerce Law, is
constructive and helpful.^
There are certain precedents applicable to a greater or less degree
for the creation of the Federal Trade Commission. In Canada, the
judicial processes have been supplemented by a pro-
analogies for cedure which, upon complaint of persons injured,
Trade Com- permits the question of attempted monopolies to be
mission investigated by a temporary commission appointed
by the court. In Australia, in 1912, there was created an Interstate
Trade Commission with a character of permanency and of expert
qualifications and with broad powers to investigate conditions
and enforce the laws regarding competition.
Until the enactment of the Trade Commission Law in the United
States, the governmental machinery for the prevention of monop-
oly has been investigation by general legislative
New act sub- " •• j'-j.^- js= j^i-j.
stitutes regu- commission or admimstrative officers and the msti-
l^lston fo?""" tutmg of court proceedings by the Department of
regulation by Justicc.^ The new act substitutes for what has been
lawsmt *' .
called regulation by lawsuit^ regulation by a con-
tinuous administrative body.
^ Federal Trade Reporter, April i, 191s, p- 196.
^ R. L. Raymond in the Journal of Political Economy, vol. 20, p. 324.
' See the Annalist (New York), April 26, 1915, p. 405.
' Since the passage of the law the United States Chamber of Commerce has ap-
pointed a committee to cooperate with the Trade Commission.
' Commissioner Davies, as quoted in the Boston Evening Transcript, February 4,
° R. L. Raymond in Journal of Political Economy, vol. 20, p. 319.
INDUSTRIAL BONDS 281
The Trade Commission Law has been criticized adversely on
these grounds : — Certain criti-
(i) The Commission has no authority to make a Trade Com-
favorable report or order. mission Law
(2) It is not empowered to recommend any rule of conduct for
the future.
(3) It is not permitted to allow combinations for the develop-
ment of foreign trade.-^
The last-named power could not be given without amending the
Sherman Law. The question of recommending any rule of conduct
for the future has been discussed. As to giving the Commission
authority to make a favorable report or order, this does not seem
to us important. If any investigation is made and the Conamission
does not make an unfavorable report, the presumption is that the
practices complained of are not illegal. Again, under the publicity
features of the law, the Commission can give out a great amount of
information, if it wishes, which will enhance the reputation and
credit of corporations.
On more general grounds, there has been a great deal of adverse
as well as much favorable criticism of the Trade Commission Law.
Some people, like Senator Sutherland and Robert R. ^^^^^ ^^_
Reed, think that the Commission is clothed with un- verse criti-
r. 1 1 J 1 r asms of me
constitutional powers. Senator butnerlana speaks 01 Trade Com-
many powers of the Commission as retroactive. He °"^^'°°
also questions the constitutional right of the Commission to
exercise semi-judicial powers over aU corporations engaged in
interstate and foreign commerce. =* Robert R. Reed considers
that if Congress has regulative power over all corporations, it
has no authority to delegate such power.' He considers also that
there is great danger of the creation and protection of monopoly
under a federal bureaucracy.^ James J. Hill fears that as time goes
on the Federal Trade Commission, like the Interstate Commerce
Commission, will constantly be given increased powers and that
the authority which it has already over all business is dangerous in
» See Butler and Lynde, The Federal Trade Commission, pp. 43-4S-
2 See the Sunday Herald (Boston), April 18, 1915.
' Commercial and Financial Chronicle, vol. 100, p. 684.
< AtlanHc Monthly, vol. cvi, p. 260.
282 AMERICAN AND FOREIGN INVESTMENT BONDS
the extreme.^ The law has been criticized also on the ground that
ordinary business has not reached the stage of development that
the railroads have reached, and that any such rigid control of in-
dustry as we have had in the case of railroads would be exceedingly
harmful.^ Senator Weeks thinks that the Trade Commission Act
will place all business in a strait-jacket. He calls attention to the
fact that boards are "long, narrow, wooden things." ' The law has
also been criticized on the ground that this is a government of
laws and not of men.* It is to be remembered that objections of
very much the same general character were raised at the time of
the passage of the Interstate Commerce Law.
The Federal Trade Commission Act, the Clayton Act, and the
Sherman Anti-Trust Law are to be thought of together as embody-
Soiution of the ^^S ^^^ ^^ federal legislation dealing with the trust
trust problem problem. This legislation has reached, in our opinion,
IS to give fair ... ., ... , „, ,
play for com- a fairly satisfactory if mcomplete stage. The real
Fair p°ay^for solution of the trust problem, — vital to investors as
combination ^^^ ^^ ^^ ^-^^ public, — in the opinion of the best
judges, is to give fair play for competition and fair play for combi-
nation.^ In other words, the solution lies in the working-out of
economic laws without interference, except in so far as that inter-
ference is necessary to prevent unfair practices. The interpretation
of the Sherman Law by the Supreme Court in the Standard Oil and
American Tobacco cases and the enactment of the Clayton and
Trade Commission Laws all point to the fact that the highest court
and Congress have come to the conclusion that unfair practices,
rather than mere combination, are what should be prevented.*
The wisdom of this view will appear still more clearly when we
consider the unfortimate history of some of our great combinations.
Such combinations do not always have things all their own way,
even when they are in a position to use unfair methods. If unfair
1 Federal Trade Reporter, March i, 1915, p. 139.
' W. L. Clause, as quoted in Federal Trade Reporter, March 15, 1915, I*. 163.
' Federal Trade Reporter, March 15, 1915, p. 182.
* Commercial and Financial Chronicle, vol. 100, p. 684, and Public Service Regtda-
Hon, January i, 1915, p. 5-
' See Journal of Political Economy, vol. 20, p. 318.
' The prohibition against holding companies would seem to modify this statement
considerably. At the same time, as stated earlier, there is nothing in the Clayton Law
to prevent ownership of two competing corporations by the same individuab.
INDUSTRIAL BONDS 283
methods are prevented, competition almost certainly will prevent
anything hke monopoly control. If any corporation
attempts to capitalize its control over markets and micHnery
a it can maintain this control only by imfair meth- p?^enting^°'
ods, aU the machinery now exists for bringing such monopoly
... , ■,-, , < . > 00 control
control to an end. From the prohibition of unfair
practices, as laid down by decisions of the Supreme Court under
the Sherman Law, as laid down in the Clayton Law, and as will be
laid down under the interpretation of the Trade Commission Act.
and through its pubUdty features, potential competition will be in
a position to know all the facts and become actual competition,
within a reasonable time.
No laws and no government are perfect. Only as the laws are
enforced and as the administrative machinery is used by men ^ can.
it be shown whether they are for good or ill. At the
same time there is nothing in the experience of the kgisiaSon as it
United States or of other countries to make us think ^y pjoyt^''
that in the long nm the trust legislation, as it exists ^^'^g^ti*'"*
to-day, will be harmful. It may be very benefidaL If
we should assume that the great majority of business men are de-
termined to carry on their business in a dishonorable, unfair, and
illegal way, it would undoubtedly be difl&cult to enforce the anti-
trust laws as they exist. If we assume, however, that most busi-
ness men intend to do somewhere near what is right and that many
business men are exceedingly glad of the opportunity to understand
more clearly how to conduct their business in accordance with the
law, the enforcement of the anti-trust laws and the work of the
Trade Commission may be positively constructive and benefidal..
There is one more suggestion that has been made for public
control of large industrial units — that is, federal incorporation.
Some who suggest this step go so far as to suggest Federal
government control of prices ^ under certain drcum- "»corporation
stances. Supervision of the issue of securities is ahnost always a
feature of this plan. Until the present body of law has been tried
1 The personnel of the new Trade Coaunission has been criticized by ex-President
Taft and others. The effectiveness of the present Commission's work remains, of
course, to be seen. (See Federal Trade Reporter, Jime 15, 1915, P- 362.)
' See William Randolph Hearst in the Boston American, January 26, 1914.
284 AMERICAN AND FOREIGN INVESTMENT BONDS
out, however, it seems to us hardly necessary to undertake federal
incorporation. In general, public control of industrial corporations,
owing to the presence of keen competition, should be much less
close and much less severe than in the case of steam railroads or of
public-service corporations.
It may throw a good deal of light on the actual working-out of
the so-caUed trust problem, especially in its bearing on the safety
„ ^ as a class of industrial bonds, to consider in a general
Corporate pro- . . - . .
motions and way certam mdustnal promotions and reorganiza-
tions. Dr. Arthur S. Dewing, of Yale University, has
published ia the Harvard Economic series a very careful and read-
able book discussing certain typical corporate promotions and reor-
ganizations. We will outline briefly some of the general principles
which he considers established and will illustrate these with a few
examples.
The purposes of the promotions or consolidations which Profes-
sor Dewing considers were mainly two: (i) To realize the economies
Certain ex- °^ large-scale production; and (2) to eliminate compe-
periencesin tition or obtain monopoly control. 1 Experience
economies of /-i
large-scale showed that often extravagant confidence was placed
m monopoly" in the economies of large-scale operation. This was
control u^g ^g^gg with the cordage, malting, asphalt, and ship-
building promotions. In these instances the expenses of promotion
and other disadvantages more than offset the estimated economies.''
In the matter of monopoly control, thirteen combinations showed
an average degree of control or average percentage of total produc-
tion of about fifty-four per cent. In individual cases, the percent-
age of production ranged from only about seventeen per cent in
the case of the National Salt Company to about eighty-five per
cent in the case of the Glucose Sugar Refining Company.' There
seemed to be no correspondence between the degree of control
and the subsequent success or failure of the business. The two
concerns having as large a degree of control as any considered —
* Dewing, Corporate Promotions and Reorganizations, p. 523.
' Ihid., pp. 4, 537-39.
• Concerns not reorganized having an unusually large degree of control were the
American Tobacco Company in the cigarette business and the American Chicle
Company in the chewing-gum business. Each of these concerns controlled about
ninety per cent of the American output. {Ibid., p. 325.)
INDUSTRIAL BONDS 285
the glucose and asphalt combinations — were stifled within two
years. ^
The prospective profits of the combination usually were esti-
mated and the capitalization arrived at on the basis of past earn-
ings — a basis which proved very imreliable. The ^ .,
. , . , . , , Failure of
average earmngs turned out to be ]ust two thirds the earnings to
i i- • i J 9 meet estimates
amount anticipated.^
In the matter of capitalization, the average proportion, in the
case of fourteen combinations, between tangible assets and total
capitalization was about forty per cent. It is interest- proportion be-
ing to note that the two concerns having the largest ^IsTt" anTtotal
percentage of control of any considered — the Glu- capitaUzation
cose Sugar Refining Company and the Asphalt Company of Amer-
ica — each had as small a percentage of tangible assets to total
capitalization as any considered.* This indicates, of course, capi-
talization of monopoly control.
Not the proportion between the tangible assets and the total
capitalization, but the form which the capitalization took, proved
important ia times of difl&culty. Issue of bonds or Formofcapi-
obligations entailing a fixed rate of interest often '^ponantThan
resulted in trouble in times of general depression or amount
when earnings fluctuated from any cause.^
In the cases of thirty-one reorganizations discussed in Professor
Dewing's book as due to financial difficulties, the failures took
many forms — ranging from inability to earn even various degrees
the operating expenses of the business to inability to °^ ^^'"^^
earn and pay normal wages, normal interest, and normal profit.
Examination of the various failures showed the inadequacy of
mere consohdation as a basis for economic efficiency. From a busi-
ness point of view there were two leading causes of ^ ,. , .
^ . .... Leadmg busi-
failure: (i) Inability to obtam admimstrative man- ness causes
agement capable of handUng a large situation; and
(2) inability to dominate the industry in the presence of actual or
potential competition.^
' Dewing, Corporate Promotions and Reorganizations, p. 527-
' Ibid., p. 546- The promotion of the American Hide and Leather Company illus-
trated an extreme case of failure to realize the estimates.
• IMd., pp. 531-33- * I^^-' P- S34. ' Ibid., p. 558.
286 AMERICAN AND FOREIGN INVESTMENT BONDS
There were almost always present three sources of competition:
(i) Old competitors not absorbed by the combination; (2) old
competitors who had sold out; and (3) new competi-
7h.r66 sources
of possible tors attracted by the exorbitant profits promised in
compe ition promotion circulars.'
In all the failures discussed in Professor Dewing's book, with the
possible exception of the American Bicycle Company, the direct
Direct cause cause of failure was the deflection of working capital
of failure to the payment of interest and dividends ; or, to put it
deflection of . \ ■^ , , . , , , • j . j
working capi- m another way, the placmg of bonds on untried mdus'
of interestand trial enterprises and the lack of conservatism in de-
dividends claring dividends. In the year before failure or reor-
ganization, eighteen out of twenty-four corporations paid either
unearned interest or imeamed dividends. The motives for pajdng
unearned dividends usually were: (i) To make a market for the
company's securities; (2) to return an income on the holdings of
directors. Evidence goes to show that if the assets had been con-
served, failure in most cases could have been avoided and a larger
ultimate return to security-holders obtained.*
, , ., A brief summary of some of the causes of failure in
lire in certain the cascs of Certain large industrial concerns may be
m VI ua cases ^^ interest,' and will be found in the table on pages
287-88. These are not all the failures discussed in Professor Dew-
ing's book, but they are the leading ones.
A consideration of the causes of failure in individual cases to-
gether with the causes in general discussed earlier
industrial con- leads One to the following conclusions: —
undertaken * (i) That attempts to Capitalize and exercise mon-
with great care opoly control, unlcss backed up by unfair
methods, are futile.^
' Dewing, Corporate Promotions and Reorganisations, p. 563.
' Dewing, pp. SS^S^, SSlS^-
' Ibid., pp. 16-17, 24-25, S7-6i, 6S-70, 79, 83-86, 93-98, 112-13, 123-2S1 133, 141,
147, 150-51, 157-59, 164, 166-69, 177-79, 182, 185-86, 197, 203-04, 210-12, 214, 220-
21, 225-26, 232, 234, 236-37, 239-42, 248, 249, 259, 263-64, 268, 286-89, 294-96, 304,
318-24, 330-31, 335, 340-43, 346, 354-56, 360, 363-64, 367, 371-72, 374-76, 399, 411-
13, 432-33, 437, 441-43, 445, 447, 45i, 462-65, 496-99, 5o8.
* Attempts to exercise monopoly control require usually either (i) maintaining
prices on an artificial level by absorbing all the surplus supplies, as the National Cord-
age Company attempted to do; or (2) cutting prices to kill competition, as the Asphalt
Company and the Com Products Company in its early days tried to do. (Dewing,
p. 600.)
INDUSTRIAL BONDS
BUSINESS FAILURES
287
Concern
United States Leather Company
National Starch Manufacturing
Company
National Starch Company
Glucose Sugar Refining Company
Com Products Company
National Cordage Company
United States Cordage Company
Standard Rope & Twine
Company
Standard Cordage Conipany
Westinghouse Electric & Manu-
facturing Company (two
reorganizations)
National Salt Company
Causes of failure
Tanning industry not suited to large-scale produc-
tion. Small plant investment, but large working
capital required. Raw material purdiased and
finished product sold under conditions of keen
■competition. General business depression
1893-98. Issue of 8% cumidative pn-eferred
stock largely to acquire unproductive timber
lands.
Poor condition of some of the plants. Heavy fixed
and txjntingent charges. Competition. Busi-
ness depression following the panic of 1893.
Mismanagement.
Increase in fixed charges. Attempt at monopoly
control. Mismanagement.
Poor condition of plants and inadequate provision
for renewals. Overcapitalization. Competition.
Mistaken trade policy and unwise dividend
policy. Expensive litigation.
Capitalization of monopoly control. Adverse
trade conditions including vigorous competi-
tion. Neglect of depreciation and obsolescence.
Unwise pajTnent of dividends. Inefficient
management.
Capitalization of monopoly control. Payment of
large dividends. Neglect of business by officers
for speculation in company's securities.
Inadequacy of reorganization of National Cordage
Company. Inability to control competition.
"Banker" management.
Keen competition. Lack of single-mindedness on
the part of officers.
Heavy burden of debt. Inefficiently equipped
mills.
Lack of conservatism of Mr. Westinghouse.
Rapid expansion involving heavy plant invest-
ment. Lack of profit in foreign subsidiaries.
Lack of working capital. Unconservative divi-
dend policy. Accumulation of large floating
debts.
Attempt at monopoly control. Extravagant con-
tracts. Inabihty to maintain monopoly prices
— due to overproduction and the mcrease of
competition.
288 AMERICAN AND FOREIGN INVESTMENT BONDS
BUSINESS FAILURES (continued)
Concern
United States Realty & Con-
struction Company
American Bicycle Company
Pope Manufacturing Company
(1907)
American Malting Company
New England Cotton Yam
Company (1903)
Union Mills Company
Mount Vemon-Woodberry Cot-
ton Duck Company
United States Cotton Duck
Corporation
Consolidated Cotton Duck
Company
International Cotton Mills
Corporation
Asphalt Company of America
National Asphalt Company
United States Shipbuilding
Company
Causes of failure
Overestimate of earning power and overcapitali-
zation. Speculation in land and securities.
Difficulties arising from relations with labor.
Unsound methods of accounting. Financial
depression of 1903.
Passing of the bicycle craze and general collapse
of the industry.
Attempt to manufacture automobiles and conse-
quent necessity for new equipment. Lack of
working capital.
Inability to control competition. Failure to real-
ize economies of large-scale production. Lack
of loyalty on the part of officers. PajTnent of
unearned dividends.
Incapable management. Unwise trade policy.
Increased costs of raw material and labor.
Unconservative dividend policy.
Difficulty of managing so large an enterprise.
Burdensome lease of the New England Cotton
Yam Company.
Industry not suited to consolidation. Unwise
issue and retention of mortgage bonds. Inabil-
ity to obtain management able to cope with the
situation. Competition. Inadequate charges
to depreciation. Attention to market for com-
pany's securities to the neglect of the business.
Complicated financial structure.
Capitalization of monopoly control. Heavy fixed
charges. Development of new process for mak-
ing asphalt. Interference of Venezuelan Gov-
ernment. Severe competition. Lack of loyalty
of higher officers.
Shipbuilding at time of promotion unusually un-
profitable. Promotion under conditions of in-
flation and misrepresentation. Placing of
bonded debt on the properties. Financial de-
pression of 1903. Lack of working capital.
Unavailability of the earnings of the Bethlehem
Steel Company, the only prosperous subsidiary.
INDUSTRIAL BONDS 289
(2) That good management is the most important factor in
success.
(3) That the competitive and fluctuating conditions surrounding
industrial enterprises make the bonding of such concerns
advisable only imder carefuUy chosen circumstances and
carefully guarded restrictions.
To state the problem ia another way: Generally speaking, only
those concerns organized to prosper under conditions of competi-
tion should be bonded, and then only to an amount the fixed
charges on which can be met easily in times of depression. ■•
Whether bonded or not, the financial structure of an industrial
concern should be built with a view to its permanent adaptability
to the industry. In order to succeed, the concern „ ,
-' ^ ' General con-
must pursue a sound trade policy and a sound finan- ditions neces-
. , , . „ . , , , . sary to success
aal poucy. bome of the most conspicuous successes of industrial
among industrial concerns are not bonded at all, '^°°*^^™^
pursue in general the policy of manufacturing a first-class product
and selling it on a small margin of profit or at a reasonable price,
and make no attempts at monopoly control. Among such concerns
may be mentioned the American Radiator Company, the General
Chemical Company,* and the Ford Motor Company.
In reorganizations, efforts usually have been made to remedy
two sets of conditions: (i) Trade conditions; (2) errors of capitali-
zation. Sometimes the policy has been pursued of ^^^ amzations
attempting to increase control of the market — as aim to correct
in the cases of the National Starch Manufacturing tions and errors
Company, the Glucose Sugar Refining Company, the ° "^^^^ ^^*'°°
National Salt Company, and the Asphalt Company of America.
As to correcting errors of capitalization, efforts in this direction —
as in railroad reorganizations — have been directed principally
toward lightening the burden of fixed charges.'
Industrial reorganizations have been formulated mainly on the
theory that the difficulties to be corrected were in- Capitalization
herent in the particular concern imder consideration an^iJTranrLd
rather than due to temporary general conditions — reorganizations
* This is without taking into consideration control of patents or of valuable sources
of raw material or ownership of real estate referred to earlier in this chapter.
' Dewing, pp. 544> 601-02. ' Ibid., pp. 602-03.
290 AMERICAN AND FOREIGN INVESTMENT BONDS
as has been the case so often in raibroad reorganizations. In
practically all railroad reorganizations, the total capitalization has
been greater after reorganization than before. In thirty-two indus-
trial reorganizations considered by Professor Dewing, on the other
hand, the total of new securities has been only eighty-nine per cent
of the old. There has been, however, an increase in the proportion
of bonds — in which these reorganizations have been markedly
unlike the leading railroad reorganizations of 1893 to 1898.'
In twenty-seven industrial reorganizations, the new fixed
^. , , charges have been seventy-eight per cent of the old.
Fixed charges ° ..,,,,.,,
in industrial Frequently the prmapal of the lien has been mcreased,
reorgamza ons j^^^ ^^ interest rate on the new bonds has been
less than on the old.''
As in railroad reorganizations, where there has been foreclosure,
minority bondholders have been paid off in accordance with the
„ , foreclosure price. This is almost sure to be much
Treatment of
bondholders in less than the face value of the debt. In the case of
reorgamza ons ^^ Asphalt reorganization, minority bond-holders
received only eleven per cent of the par value of their bonds.
Bondholders who have gone into reorganizations, whether after
foreclosure or not, usually have received new income bonds or
preferred stock.' Sometimes the debt has not been disturbed, as
in the case of the United States Leather Company debentures.*
We give on page 291 a table showing reorganiza-
bondhoiders m tions involving Sacrifices by bondholders.* An exam-
reorgamza ons jj^g^^jgj^ pf j^g table shows that in two cases — that of
the Standard Rope and Twine Company and that of the National
Asphalt Company — there was an assessment on bondholders.
The new securities obtained in exchange for old bonds were: in two
cases — the United States Cordage Company and the Standard
Rope and Twine Company — income bonds; in one case — the
National Cordage Company — first preferred stock; in one case —
1 Dewing, pp. 611-14. • Ibid., pp. 611-13. » Ibid., p. S94.
♦ Ibid., p. 35- Other usual features of industrial reorganizations have been:
Surrender by preferred stockholders of their claim to cumulative dividends and the
acceptance of a security bearing a lower rate of income; severe cutting-down of the
par value of the holdings of common stockholders; and furnishing of new money either
by bankers or by assessment of old security-holders.
' Ibid., p. S94.
mOUSTWAL BONDS
291
292 AMERICAN AND FOREIGN INVESTMENT BONDS
the American Bicycle Company — second preferred stock; in two
cases — Mt. Vemon-Woodberry Cotton Duck Corporation and
the Asphalt Company of America — preferred stock to the extent
of fifty per cent of the old bonds; and in one case — the National
Asphalt Company — common stock to the extent of forty per cent
of the old bonds.
AH industrial reorganizations considered have sought to relieve
the accumulated and unmanageable floating debt brought about
by the deflection of money from the needs of the busi-
Summary of ,
industrial ness to the payment of interest and dividends. All
reorganizations • j.- i_ i j. i j. • i
reorganizations have sought also to improve, when
necessary, trade conditions. As a whole, they have sought "to
achieve the financial rehabilitation of the corporation along lines
leading to permanent success." '■
AH the considerations discussed so far in this chapter are of a
Necessa to Dio^e or less general nature. In trying to determine
consider each the Safety of any given industrial bond issue, it is
issue on its necessary to confine one's attention to the individual
own men s property and business and _the conditions surroimd-
ingit.
Examples of strong industrial bond issues are: American
Agricultural Chemical 5% October i, 1928; General Electric 5%
Examples of September i, 1952; Swift & Company 5% July i,
strong indus- 1944; Wcstem Electric 5% December 31, 1922. The
American Agricultural Chemical Company controls
a large amount of phosphate rock — a material necessary for the
manufacture of commercial fertilizers; owns and operates over
fifty plants in various parts of the United States; has a large
amount of net quick assets; and has shown its ability to make good
net earnings over a long series of years and even in times of general
business depression. The General Electric Company controls valu-
able patents; has an unusually large amoimt of net quick Eissets
compared with its debt; and has shown its ability to earn even
imder adverse circumstances many times the interest charges on
its bonds. Swift & Company have a plant investment over twice
the amount of the mortgage bonds, and must have at all times net
quick assets equal at least to the amoimt of the debt. The Western
1 Dewing, p. 614.
INDUSTRIAL BONDS 293
Electric Company has total assets over four times the amount of
its debt, and must always have net quick assets at least double
the amount of these bonds outstanding. Many other examples
of strong industrial bond issues could be given.
We give below prices on July 3, 1914, or the near- prices of lead-
est date, of certain leading industrial bond issues SS"'
listed on the New York Stock Exchange.' •" '914
PRICES JULY 3, 1914 OF LEADING INDUSTRIAL BONDS —
PRICES "AND INTEREST."
Isstie Prica-
American Agricultural Chemical 5% 1928 looi
American Hide & Leather 6% 1919 i02|
American Ice Securities 6% 1925 89
American Thread 4% 1919 94|>
American Tobacco 6% 1944 i2i|,
American Writing Paper 5% 1919 65
Baldwin Locomotive Works 5% 1940 103I
Bethlehem Steel 5% 1926 99
Central Leather 5% 1925 99f
Com Products Refining 5% 1931 94I
Distillers Securities 5% 1927 S8§
E. I. du Pont Powder 4^% 1936 86
General Electric 3!% 1942 79
General Motors 6% 1915 loof
International Paper 6% 1918 99I
International Steam Pump 5% 1929 44
New York An: Brake 6% 1928 97
Republic Iron & Steel 5% 1934 104I;
Standard Milling 5% 1930 88
The Texas (Oil) 6% 1931 102
Union Bag & Paper 5% 1930 85!
U. S. Realty & Improvement 5% 1924 83I
U. S. Rubber 6% 1918 io2f
U. S. Steel s% 1963 ^°3
Western Electric 5% 1922 ioi|
Westmghouse Electric & Manufacturing 5% 1931 9Sf
This table indicates the wide variation in degree of safety of differ-
ent issues. We have here bonds selling aU the way from 44 per cent
of their par value to 121^ per cent. The "income basis" or net
' Commercial and Financial Chronicle, vol. 99, p. 35.
294 AMERICAN AND FOREIGN INVESTMENT BONDS
return of some of the issues hardly is worth trying to figure; that of
some of the highest priced issues — such as American Agricultural
Chemical 5 per cents, American Tobacco 6 per cents, Baldwin
Locomotive 5 per cents, General Electric 3^ per cents, Republic
Iron and Steel 5 per cents, United States Steel 5 per cents, and
Western Electric 5 per cents — is less than 5 per cent.
The European War has changed greatly the business and pros-
pects of many of our leading industrial concerns. Those companies
Effect of the receiving orders for mimitions and other war supplies
onindustri^" ^^^^ shown a great increase in business. Among these
bonds juay be mentioned the Bethlehem Steel Corporation,
E. I. du Pont de Nemours Powder Company, and the Westing-
house Electric and Manufacturing Company. The bonds of all
these companies were selling in July, 1915,' at considerably higher
prices than they sold in July, 1914.
We have not meant to say in this chapter that aU industrial
bond issues are less safe than all railroad or public-service issues.
Selection of Throughout this book we have tried to lay stress on
industrial bonds the fact that each bond issue of any kind must be
requires judged on its own merits. At the same time we do feel
great care ^^^ ^^ Conditions surroimding the issue of industrial
bonds prompt greater care in the selection of such bonds than do
the conditions surrounding any other well-known classes of invest-
ment bonds.
> See Commercial and Financial Chronicle, vol. loi, p. 37.
CONCLUSION
Tms book has been completed in the midst of a period of world-
wide upheaval. The relation of peoples to their governments, the
trade relations between the great nations of the world, and the rela-
tive positions of those nations in the leadership of civilization are
in process of change. One fact only, perhaps, is clear even now:
that the United States rapidly is attaining a position of power
which it never has held before. Not only is the broad basis for the
safety of American securities greater than ever before, but the
United States is approaching the position of furnishing the leading
market for the securities of other nations.
It is hoped that this book has thrown some light on the leading
principles governing investment in bonds.
THE END
APPENDIX
COUNTY AND MUNICIPAL DEFAULTS
EARLY PERIOD
Elizabeth, New Jersey, defaulted interest on its city bonds February
I, 1879. The cause of the default was the spirit of speculation and the
desire for local improvements prevailing from 1869 to Elizabeth,
1873. The dty loaned its credit liberally for improve- New Jersey
ments, and levied assessments by the linear foot to reimbmrse itself. In
1875, a court decision held that assessments should be made according
to the "present" benefit derived by property-owners from the improve-
ments. As many of the improvements had deteriorated greatly in value,
the dty thereby was burdened directly with a debt of about $3,000,000.^
Later, the city had difl&culty in collecting taxes.^ Citizens then set up
claims of unconstitutionality and illegality in the issue of the bonds.
Judgments were obtained, however, by bondholders.^ June 3, 1880, the
New Jersey Supreme Court confirmed the judgment of the lower court,
upholding the validity of the bonds.* The United States Circuit Court
denied a motion for the appointment of a receiver or trustee for the city.°
Later the legislature gave authority to Elizabeth to compromise this
debt.' At first, fairly Uberal terms for the bondholders were sug-
gested.^ Elizabeth soon put forward the claim, however, of inability
to pay more than fifty cents on a dollar. In 1882, the debt with interest
amoimted to $6,700,000, while the total value of the taxable property
was only $12,182,035.* Later, the court issued an order for the city to
show cause why it should not pay its debt. A similar previous order had
caused five out of eight assessors to resign before the order was served
against them.' In July, 1888, a resolution of the City Council was
passed authorizing the Mayor, Comptroller, and the Commissioners of
the Sinking-Fund to issue 4% adjustment bonds for old obligations of
the city at a rate not higher than fifty per cent of their par value and
accrued interest.'"
Memphis, Teknessee, defaulted interest January i, 1873.'* In 1877,
' Commercial and Financial Chronicle, vol. 28, p. 146.
' Ibid., vol. 29, p. 120. ' Ibid., vol. 29, p. 563. » Ibid., vol. 35, p. 602.
• Ibid., vol. 29, p. 277. • Ibid., vol. 32, p. 312. » Ibid., vol. 39, p. 581.
* Ibid., vol. 30, p. 589. ' Ibid., vol. 32, p. 368. " Ibid., vol. 47, p. 50.
'' Investors' Supplement, Commercial and Financial Chronicle, January 26, 1878,
p. 10.
298 APPENDIX
the so-called " Flippen" compromise of fifty cents on a dollar of principal
Memphis, and interest in new thirty-year 6% bonds was arranged.^
Tennessee -phe Mayor of the city, in a message to the City Council
a few years before, had referred to the judgment of the United States
Circuit Court on certain bonds of the city of Memphis. The Mayor said
that for one lot of $67,000 bonds issued, the city had received only
$17,789.17. It was the duty of the city, said the Mayor, to resist pay-
ment beyond "price or sum realized, or the price paid for them by the
holder," with the legal rate of iuterest added. A local newspaper esti-
mated the whole amount of questionable bonds as about $2,450,000. It
claimed that the city never had realized more than an average of forty-
two cents on a dollar of this amoimt — " Say it realized fifty cents, which
will answer as probably covering cost of litigation." *
Owing to a yellow-fever epidemic in 1878, the dty again was unable to
take care of its obligations. A repudiation meeting of citizens was held.*
January 29, 1879, the Tennessee Legislature passed two bills repealing
the city charter of Memphis and creating the "Taxing District of Shelby
County." ^ The lower court appointed a receiver for the city,* but thk
action later was invalidated by the United States Supreme Court.^
Later still, the United States Circuit Court at Memphis held the taxing
district liable for the old debt of the city.'' This old debt, not previously
compromised, finally was funded at fifty cents on a dollar into new bonds
bearing interest for the first three years, from January i, 1881, at 3%,
for the next tliree years at 4%, and thereafter at 6%. The lower interest
rates were to be capitalized, so as to give the holders 6%. The "Flip-
pen" compromise bonds were exchangeable at par.* Including capitali-
zations, the settlement was effected at an average rate of 60.53%. From
July, 1889, interest on the so-called "Tax District" 4-6 per cents and on
the "Flippen" stamped bonds was paid at the rate of 6% per annum.'
PiTTSBTTRG, PENNSYLVANIA, after the Construction of the Pennsyl-
vania Railroad, wanted more rapid and more direct communication with
Pittsburg, the West. It subscribed to the capital stock of five railroad
Pennsylvania companies and issued in payment $1,800,000 dty bonds
at 6%. A few years later, owing to general finandal disasters, the rail-
way stocks declined in value and paid no dividends. The dty, having
rehed on these dividends, failed to pay the interest on its bonds. Suit
was brought, judgment obtained, and the railroad stocks levied on. The
city permitted the stocks to be sold at a sacrifice and a large part brought
' Commercial and Financial Chronicle, vol. 25, p. 114. ' Ibid., vol. 18, p. 526.
' Ibid., vol. 27, p. 678 and vol. 31, p. 328. * Ibid., vol. 28, p. 121.
5 Ibid., vol. 28, p. 173. " Ibid., vol. 32, p. 70. ' Ibid., vol. 34, p. 604.
' Ibid., vol. 37, p. 202.
' Investors' Supplement, Commercial and Financial Chronicle, July 28, 1888, p. 10.
APPENDIX 299
only ten cents on a dollar. The city later proposed a compromise by
which the 6% bonds were exchanged for 4% bonds having fifty years to
run. The greater part were exchanged. Some creditors refused to accept
and brought suit for interest on the old bonds. The judgments, amount-
ing to over $500,000, were paid in currency in 1871.'
Again in 1877, the city defaulted in interest on certain bonds.* The
cause of this default was extensive improvements, including newly
paved streets. Bonds to pay for these improvements were issued by the
city, but were supposed to be paid out of special assessments. The law
permitting issue of these special assessment bonds was declared illegal
by the Supreme Court of the State.' In March, 1879, ^ ^^'^ ^°^^ ^^s
subscribed to pay the overdue interest on these Pittsburg 7 per cents,
known as the "Penn Avenue" bonds.*
St. Clair County, Missotjki, in 1870 issued bonds in aid of the
Tebo & Neosho Railway. The proposed railroad never was built, and
the taxpayers repudiated the bonds,* Holders of the g^ q^;^
bonds resorted to the courts over and over again without County,
avail. The State Supreme Court held the county not '^^°""
liable. The United States Circuit Court, however, on the theory that
the bondholders were innocent purchasers, ordered a tax levy to pay
principal and interest. This amounted, at the time of the decision, to
nearly $900,000, although the issue of bonds was only $200,000.' The
debt had grown to be about one third of the assessed value of the whole
county. Members of the County Court persistently refused to make a
levy. Several members served jail terms for contempt, and one of the
qualifications for oflSce in the county was a willingness to go to jail
rather than be a party to the levy.^ AJl the bonds of this county are still
in litigation.*
LATER PERIOD
Galveston, Texas, defaulted December i, 1901, in interest due on
limited debt bonds of 1881.° The default was due to the great storm of
September 8, 1900, in which over 7500 persons were lost Galveston,
and fully as many more left the city to seek employment '^^^^
elsewhere.^* In tie final settlement, there was simply a reduction of
* Commercial and Financial Chronicle, vol. 13, p. 242.
' Ibid., vol. 24, p. S19. ' Ibid., vol. 24, p. 591- * ^*«*m vol. 28* p. 302.
6 Ibid., vol. 66, p. 819 and vol. 89, p. 1293. ' Ibid.
' Ibid., vol. 89, p. 1293.
8 State and City Section, C(WJ>»erct(rf a«rf FJwoBcio/ Cfo-owfete, May30, I9i4,p. 124.
» Commercial and Financial Chronicle, vol. 73, p. 1273.
i" State and City Section, Commercial and Financial Chronicle, May 30, 1914,
p. 19s, and Commercial and Financial Chronicle, vol. 71, p. 564.
3CO APPENDIX
interest from s% to 25% for a period of five years from December i,
1901.* This was agreed to willingly by most of the bondholders.^
MiDDLESBORO, KENTUCKY, was a flourishing town in the early nineties,
and was the center of what was considered to be a staple iron and steel
Middlesboro, manufacturing district. An English syndicate was inter-
Kentucky ested in developing the iron business there, but after many
years the quality of the ore ran out and this large EngUsh plant was
abandoned. Later, other plants moved away, taking with them a great
deal of the population. The character of the city changed entirely, and
it was not long before the new population began to question the debts
settled on it by the old and to demand a readjustment. Interest was
defaulted and the matter taken to the courts by bondholders.^ The
United States Circuit Court declared the debt vaUd and binding. An
agreement between a bondholders' committee and the city provided as
follows: From October i, 1905, interest was reduced from 6% to 4%,
and a lump sum of $28,000 was agreed on for overdue interest, judg-
ments, etc., to be paid in fourteen annual installments of $2000 each,
beginning on or before December 31, 1907.'
' Commercial and Financial Chronicle, vol. 74, p. H02.
' Information received from bankers.
' Commercial and Financial Chronicle, vol. 84, p. 404.
REFERENCES FOR CERTAIN COUNTY AND
MUNICIPAL DEFAULTS
AusHn, Texas.
State and City Section, Commercial and Financial Chronicle, May 30,
1914, p. 193.
Commercial and Financial Chronicle, vol. 69, p. 91 ; vol. 70, pp. 46 and
7SS; vol. 71, p. 45 ; vol. 73, p. 459; vol. 74, p. 590.
Birmingham, Alabama.
State and City Supplement, Commercial and Financial Chronicle,
April 13, 1901, p. 171.
Commercial and Financial Chronicle, vol. 61, p. 338.
Cairo, Illinois.
State and City Supplement, Commercial and Financial Chronicle,
April 1897, p. 97.
Dallas County, Missouri.
State and City Supplement, Commercial and Financial Chronicle,
April 29, 1893, p. 113.
Commercial and Financial Chronicle, vol. 69, p. 1074; vol. 87, p. 1039;
vol. 90, p. 63; vol. 94, p. 1263; vol. 96, p. 1241; vol. 98, p. 626.
Elizabeth, New Jersey.
Commercial and Financial Chronicle, vol. 28, p. 146; vol. 29, pp. 120,
277, and 563; vol. 30, p. 589; vol. 32, pp. 231, 253, 312, and 368;
vol. 35, p. 602; vol. 37, p. 342; vol. 39, p. 581; vol. 40, p. 625; vol.
42, p. 93; vol. 46, p. 828; vol. 47, p. so.
Evansville, Indiana.
Commercial and Financial Chronicle, vol. 41, pp. 494 and 527; vol. 43,
p. 607; vol. 44, p. 335; vol. 45, p. 112.
Fort Worth, Texas.
State and City Section, Commercial and Financial Chronicle, May 30,
1914, p. 195-
Commercial and Financial Chronicle, vol. 66, p. 775; vol. 67, p. 1072;
vol. 69, p. 711; vol. 72, p. 100; vol. 76, p. 223; vol. 79, p. 1291.
Galveston, Texas.
State and City Section, Commercial and Financial Chronicle, May 30,
1914, p. 195.
Commercial and Financial Chronicle, vol. 71, p. 564; vol. 73, p. 1275;
vol. 74, p. 1102.
302 APPENDIX
Green County, Kentucky.
State and City Section, Commercial and Financial Chronicle, May
1908, p. 163.
Commercial and Financial Chronicle, vol. 77, p. 48; vol. 78, p. 1234;
vol. 81, p. 1059; vol. 84, p. 949; vol. 96, p. 1507.
Macon County, Missouri.
State and City Section, Commercial and Financial Chronicle, Nov. 26,
1904, p. 2354.
State and City Section, Commercial and Financial Chronicle, May,
1908, p. 124.
Commercial and Financial Chronicle, vol. 79, p. 1352; vol. 80, p. 179;
vol. 92, p. 1191; vol. 93, p. 548.
Memphis, Tennessee.
Investors' Supplement, Commercial and Financial Chronicle, January
26, 1878, p. 10; July 28, 1888, p. 10.
Commercial and Financial Chronicle, vol. 18, p. 526; vol. 25, p. 114;
vol. 27, p. 678; vol. 28^ pp. 121 and 173; vol. 31, p. 328; vol. 32,
p. 70; vol. 34, p. 604; vol. 36, p. 221; vol. 37, p. 202; vol. 38, p. 509;
vol. 39, p. 727.
Middleshoro, Kentucky.
Commercial and Financial Chronicle, vol. 84, p. 404.
Mobile, Alabama.
Investors' Supplement, Commercial and Financial Chronicle, February
26, 1876, p. 10; May 31, 1879, p. 10; February 25, 1882, p. ii; July
30, 1887, p. 10.
Commercial and Financial Chronicle, vol. 16, p. 661; vol. 17, p. 19;
vol. 21, p. 302; vol. 25, p. 382; vol. 28, pp. 224 and 327; vol. 29,
P- 374-
Mt. Vernon, Indiana.
Commercial and Financial Chronicle, voL 39, p. 383.
Nebraska City (Otoe County), Nebraska.
State and City Section, Camtnercial and Financial Chronide, May 30,
1914, p. 131.
Commercial and Financial Chronicle, vol. 72, p. 302.
New Orleans, Louisiana.
Commercial and Financial Chronicle, vol. 27, pp. 228 and 628; vol. 28,
p. 352; vol. 30, pp. 466, 494, and 650; vol. 31, pp. 606-07; vol. 35,
pp. so and 763; vol. 47, pp. 50 and 17a.
Pittsburg, Pennsylvania.
Commercial and Financial Chronide, vol. 13, p. 242; vol. 24, pp. 519
and 591 ; vol. 28, p. 302.
St. Clair County, Missouri.
State and City Section, Commercial and Financial Chronicle, May 30,
1914, p. 124.
APPENDIX 303
Commercial and Financial Chronicle, vol. 66, p. 819; vol. 89, p. 1293.
St. Joseph, Missouri.
Commercial and Financial Chronicle, vol. 23, pp. 135 and 175; vol. 25,
p. 408; vol. 28, p. 477; vol. 32, p. 659; vol. 43, p. so.
Savannah, Georgia.
Investors' Supplement, Commercial and Financial Chronicle, January
26, 1878, p. 13.
Commercial and Financial Chronicle, vol. 25, pp. 41 and 382; vol. 26,
pp. 18 and 625; vol. 27, pp. 123, 173, and 568.
Superior, Wisconsin.
State and City Supplement, Commercial and Financial Chronicle,
April 10, 1897, p. no.
State and City Section, Commercial and Financial Chronicle, May 28,
1904, p. 2149.
Commercial and Financial Chronicle, vol. 73, pp. 801 and 11 24; vol. 74,
pp. no and 590; vol. 78, p. 1569; vol. 79, pp. 2107 and 2807; vol.
93. P- 301-
[Copy]
THE SUPREME COURT
OF KANSAS
ToPEEA, Nov. 7, 1914.
GooDALE & Nash,
Boston, Mass.
Deas Sirs: —
Answering yours of the 3rd inst. beg to advise that the case you refer
to was the case of Levison vs. Finney, No. 18934, and was never reported
for the reason that the case never came to a final hearing on the matter
of levying tax. At the time the application was made for the writ, this
court held that it had jurisdiction to require the levy to be made and
give the defendant time to answer raising any question it desired as to
the vaUdity of the indebtedness; it also restrained the defendant from
making any levy for the ciurrent year, but did not preclude the levy of a
tax for the purpose indicated, subject to change on order of the court.
Yours truly,
D. A. Valentine,
Clerk Supreme Court,
RAILROAD LAWS
LAWS rOEBIDDING COMBINATION AND CONSOLIDATION
Massachusetts: Acts, 1907, chap. 585.
Minnesota: General Laws, 1907, chap. 395.
Oklahoma: Constitution of Oklahoma, adopted 1907, art. ix, sees. 8, 9.
Pennsylvania: Laws of Pennsylvania, 1907, nos. 254 and 281.
Utah: Laws of Utah, 1907, chap. 93, sec. 6.
LAWS ORDERING CHANGES EST CONSTRUCTION OF ROAD OR
ROLLING-STOCK
Illinois: Laws of Illinois, 1907, p. 476 (safety appliances).
Indiana: Acts, 1907, chap. 205 (block signak).
Acts, 1907, chap. 118 (safety appliances).
Kansas: Laws of Kansas, 1905, chap. 346; ibid., 1907, chap. 277.
Michigan: Public Acts, 1907, chap. 312, sees. 13, 34 and 35; ibid., chap.
234 (automatic couplers).
Minnesota: General Laws, 1905, chaps. 208, 280.
General Laws, 1907, chaps. 54, 202, 276, 333, 396.
Missouri: Laws of Missouri, 1905, pp. 100, 106, 107.
Laws of Missouri, 1907, pp. 181, 182 (safety appliances).
Montana: Laws of Montana, 1905, chap. 29; ibid., 1907, chap. 59
(cattle-guards and fences).
Laws of Montana, 1907, chap. 54 (size of cabooses).
New York: Laws of New York, 1907, chap. 208, p. 403 (steam-cocks,
etc., on locomotives).
North Dakota: Laws of North Dakota, 1907, chaps. 209, 210, 211.
Ohio: Laws of Ohio, 1906, p. 342, act approved April 16, 1906, sec. 9;
ibid., pp. 46, 75.
South Carolina: Acts, 1906, no. 2.
South Dakota: Session Laws, 1907, chap. 212.
Texas: Laws of Texas, 1905, chaps. 56 and 133.
Laws of Texas, 1907, chaps. 32 and 155.
Virginia: Acts of Assembly, 1906, chaps. 298 and 302.
Vermont: Laws of Vermont, 1906, no. 118, sees. 18 and 27; nos. 119 and
120. '-"i
Washington: Laws of Washington, 1905, chap. 164, sec. 10 (spark-
arresters). '
306 APPENDIX
Washington: Laws of Washington, 1907, chap. 138, and chap. 226,
sees. 13-14 (safety appliances).
Wisconsin: Laws of Wisconsin, 1905, chap. 264, sec. 17, chap. 348.
Laws of Wisconsin, 1907, chap. 595.
LAWS SHORTENING HOURS OF LABOR
Connecticut: Public Acts, 1907, chap. 242.
Indiana: Acts, 1905, chap. 169, sec. 674.
Acts, 1907, chap. 131.
Iowa: Laws of Iowa, 1907, chap. 163.
Kansas: Laws of Kansas, 1905, chap. 342.
Laws of Kansas, 1907, chap. 280.
Minnesota: General Laws, 1907, chap. 253.
Missouri: Act approved March 25, 1905.
Laws of Missouri, 1905, p. 112.
Montana: Laws of Montana, 1907, chap. 5.
New York: Laws of New York, 1907, chaps. 523 and 627.
Nevada: Statutes, 1907, chap. 186.
North Carolina: PubUc Laws, 1907, chap. 456.
North Dakota: Laws of North Dakota, 1907, chap. 207.
Oregon: General Laws, 1905, chap. 143.
South Dakota: Session Laws, 1907, chap. 220.
Texas: General Laws, 1907, chap. 51.
Washington: Laws of Washington, 1907, chap. 20.
West Virginia: Acts, 1907, chap. 59.
Wisconsin: Laws of Wisconsin, 1907, chaps. 575 and 655.
LAWS HELD TTNCONSTITUnONAL
Among railroad regulative laws that have been held to be unconsti-
tutional, the following may be mentioned: —
Laws of Wisconsin, 1907, chap. 266, p. 402: providing that an upper
berth in a sleeping-car shall, when unoccupied, be closed at the option
of the occupant of the lower berth.- State v. Redmon, 134 Wis. 89, 114
N.W. 137.
Laws of Alabama, 1907, p. 711: fixing maximum freight and passenger
rates on business within the State, and providing that on violation the
railroad company and its agents should be liable respectively to pen-
alty and to criminal prosecution, so that a railroad could not test the
validity of the statute without risk of bankruptcy. Central of Georgia
Railway Co. et al v. Railroad Commission of Alabama, 161 Fed. Rep.
925-
Laws of North Dakota, 1907, chap. 199, p. 327: providing for a maximimi
APPENDIX 307
passenger rate of two and one half cents per mile and further providing
for mileage books at two cents per mile, good for purchaser and such
adult members of his family as he may designate. This latter provi-
sion was held invalid as being discriminatory. State v. Great Northern
Railway Company, 17 N.D. 370, 116 N.W. 89.
Laws (Washington), 1905, p. 238, sec. 2: arbitrarily fixing the weight of
standards for limiber cars at one thousand pounds, and requiring such
weight to be deducted from the net weight of the limiber on all car-
loads received for shipment, regardless of the actual weight of such
-standards. State v. Great Northern Railway Company, 43 Wash. 658,
86 Pac. 1056.
Acts of Assembly (Virginia), 1906, chap. 256: fixing a maximum rate for
mileage books not applicable to passenger fares generally. Common-
wealth V. Atlantic Coast Line Railway Company, 106 Va. 61, 55 S.E.
572.
Session Laws (Nebraska), 1905, chap. 105, sees, i and 6: requiring rail-
road to build switches at request of owner of elevator and providing
no compensation. Missouri Pacific Railway Company v. Nebraska,
217 U.S. 196.
Laws (Illinois), 1907, p. 746: fixing maximum passenger fares so low'as
to involve confiscation. Trust Company of America s. Chicago Pacific
and St. Louis Railway Company, 199 Fed. Rep. 593.
Acts (West Virginia), 1907, chap. 41 : fii^g maximum passenger fares so
low as to be confiscatory. Coal and Coke Railway Company v. Conley
et al, 67 W.Va. 129, 67 S.E. 613.
The above are merely typical examples and by no means a complete
list of such cases.
3o8
APPENDIX
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INDEX
Accounts, supervision of public-service
coiporation, by state commissions, 232.
Alabama, debt history of, 122-124.
American investments in foreign countries,
70-71.
American securities held abroad, 6^-70.
Anglo-French dollar loan, 88-91.
Argentine Republic, special security for
certain bonds of, 5.
Arkansas, debt history of, 109-110.
Assessed valuation: for all States, 1912-
1913, 98, 99; percentage of debt to as-
sessed valuation for all the States, 98,
99; relation between true value of prop-
erty and, 98; of counties and incor-
porated places, 141.
Assessments: in railroad reorganizations,
186, 188-191 ; in public-service reorgani-
zations, 246-248; in industrial reorgani-
zations, 290-291.
Assets offsetting national debts, 17-19.
Atchison, Kansas, attempted bad faith by,
1SS> 304.
Atchison, Topeka & Santa F£ Railroad
Company: causes of failure of, 167;
siunmary of reorganization of, 187;
foreclosure price compared with debt
of, 187; what security-holders received
in reorganization of, 188; market value
of new securities received in reorganiza-
tion of, 193.
Austria-Hungary: price of Austrian and
Hungarian bonds 1913, 7; racial origin
of, 9; outline of history of, 13; popula-
tion, wealth and debt of, 15-17; assets
offsetting national debt of, 18; national
debt charge compared with national in-
come, 20; national debt charge com-
pared with total government expendi-
ture, 21; growth in population of, 22, 23;
growth in wealth of, 24-25; increase in
debt of, 27, 29; debt history of, 39-40;
form of government in, 62; character of
population of, 63; military position of,
64; economic position of, 65; foreign
commerce of, 67, 68; position of, among
nations, 73; prices of Austrian rentes,
77; cost of present war to, 76, 78; total
losses of present war to, up to July 31,
1915, 79; war loans put out since begin-
ning of present war up to October 23,
1915, 82, 83; war prices of govermnent
bonds, 91, 92; state-operated railways
in, 176.
Bad faith, cases of, 155; attempt at, by
Atchison, Kansas, 155, 304.
Baltimore & Ohio Railroad Company:
causes of failure of, 167; summary of
reorganization of, 187; what security-
holders received in reorganization of,
191; market value of new securities re-
ceived in reorganization of, 193.
Banking business, ix, 65, 68.
Banking commissions, 68.
Bohvia, government loans in default, 59.
Bond business in the United States, z.
Bond investment, framework of, 3.
Bonding, of industrial concerns, 237.
Bonds: investment in, a modem develop-
ment, ix; as a channel of investment, i;
what they represent, 3; principal classes
of investment, 3 ; the two great markets
for, 3 ; framework of bond investment, 3 ;
safety of , 3-4; United States and for-
eign government, 5-93; state, 94-139;
county, municipal, and district, 140-
161; special assessment, 140; steam-
railroad, 162-197; public-service cor-
poration, 198-250; industrial, 251-294;
municipal refunding, 150; first mort-
gage, 162; consolidated mortgage, 162;
general mortgage, 162; debenture, 162;
plain, 162; income, 162; convertible,
162; equipment, 162-163; collateral
trust, 162-163; terminal, 163; guaran-
teed, 163.
Boston Sliding Scale Act, 206.
Bulgaria, special security for certain
bonds of, 5-6.
312
INDEX
California: debt history of, 112-113; fa-
vorable factors affecting credit of, 137;
joint use of facilities by public-service
corporations in, 216; California Com-
mission on determining fair value as a
basis for rates, 221; local regulation of
public-service corporations in, 233.
Capitalization : of American and European
railways compared, 194; gross and net,
of all railroads, 197; regulation of pub-
lic-service, by state commissions, 230-
232; total, in industrial and railroad
reorganizations, 289-290.
Certificates of public convenience and ne-
cessity, of public-service corporations,
209, 212-213; conditions regulating is-
suance of, 213.
Certification: of state bonds, 131; of
county, municipal, and district bonds,
157-158.
Chicago City Railway Company, fran-
chise of, 206.
Chicago Railways Company, franchise of,
206.
Chicago Union Traction Company, re-
organization of , 241, 243, 244, 246, 248.
Circuit Coiurt of Appeals: jurisdiction of,
in enforcement of Clayton Act, 272;
appeal from Federal Trade Commission
to, 273.
Civilization, changes in leadership of, 9-
10.
Clayton Anti-Trust Law: enactment of
the, 267; leading provisions of the, 268-
269; amplifies and supplements the
Sherman Anti-Trust Law, 269-270; in
regard to exports, 270; holding com-
panies, 270; interlocking directorates,
271; personal-guilt clause in the, 271;
machinery of enforcement of the, 271-
272; simmiary of the, 272.
Cleveland Railway Company, franchise
of, 206-207.
Colombia, government loans in default,
59-
Combination: forms of, 258-239; econom-
ic advantages of, 259-260; disadvan-
tages of, 260-261; successful and im-
successful large-scale operation, 261;
distinction between advantages and
disadvantages of, and monopoly control,
261; motives for, 262; advantages of
corporate form of, 262.
Commission form of government, 157.
Commissions: regulation by state, of
public-service corporations, 207-233;
modem public-service, 208, 209, 210-
212; present state, having jurisdiction
over street-railway, gas, electric-light
and power or telephone companies, 209,
210-212; leading principles of regula-
tion of publicrservice corporations by
state, 209, 212-232; authority of, over
rates of public-service corporations,2i8;
authority of, to approve or disapprove
issue of public-service securities, 230-
232; judicial review ofjdedsions by state
commissions, 232-233.
Competition: railroad, 164-165, 166, 256;
public-service corporation, 256; govern-
ing factor in existence of industrial con-
cerns, 256; saving of the wastes of, 260;
monopoly control and, 267; potential
and effective, 267; imfair mediods of,
272-273, 275-276; three sources of pos-
sible, in failure of industrial concerns,
286.
Consolidated mortgage bonds, 162.
Consolidations: attitude of state com-
missions toward public-service corpora-
tion, 213-214; basis on which, are per-
mitted in various States, 214; purposes
of industrial promotions and, 284.
Constitutional limitations in regard to
creation and payment of state debt,
129-131; of local debt, 143-152.
Convertible bonds, 162.
Corporations: various classes of public-
service, 198; origin and development of
bu^ess done by public-service, 199-
202; points of similarity in different
classes of public-service, 202; rate of
return on capital invested in public-
service, 219; broad relation of public-
service, to the people, 238-239; develop-
ment of, as a means of carrying on
business, 251-252; fluctuating nature of
business done by industrial, 252; net
earnings of some leading industrial, 252-
255; competitive nature of business
done by industrial, 256; importance of
good management of industrial, 256-
257; question as to whether competitive
industrial, should be bonded, 257; con-
ditions which may furnish proper basis
for bonding of industrial, 257-258; ad-
INDEX
313
vantages to industrial concerns in com-
bining in form of, 262; subject to pub-
lic control, 262; suggestion of federal
incorporation of industrial, 283-284;
causes of failure in special cases of in-
dustrial, 287-288; caretakenin bonding
of industrial, 286-289.
Costa Rica, government loans in default,
59-
Cost of service as a basis for rates, 218-
219.
Cost of war: to leading nations involved,
76-77, 78-81; comparison of present,
with that of previous wars, 80.
County bonds: definition of, 140; meansof
recovery on defaulted, 140; factors gov-
erning safety of, 140-141, 152-153, i57;
laws in regard to issue of, in Massachu-
setts, 143-146; comparison of Massachu-
setts laws with those of other States in
regard to issue of, 146-152; purposes of
issue of, 148-150; issue of, for improper
or tmwise purposes, 149-150; length of
time which bonds may run, 150-151;
vote of people to authorize, 151; pay-
ment of, by sinking-fund or serial meth-
od, 151; amount and character of popu-
lation important factors in safety of,
i5?-iS3; record of, 153-157, 297-303;
causes of default in, 154-155, 297-303;
settlements made with bondholders on
defaulted, 155-156, 297-303; legality of
issue and certification as to genuineness,
157-158; safety of, 161.
Credit: of nations shown by prices of their
bonds, 7, 8; bearing of historical devel-
opment on, 15; certain factors deter-
mining national, 15, 58, 63-71; normal
conditions vs. the war, 15; most impor-
tant factor in estimating national, 58;
considerations in estimating state, 94-
95, 132-137; summary of factors bear-
ing on state, 137.
Creditor nations, 65-70.
Debenture bonds: definition, 162; reme-
dies for non-payment of, 163.
Pebt: of leading civilized nations, 15-17;
percentage of national, to resources, 16;
assets offsetting national, 17-19; bur-
den of national, 19; comparison of na-
tional debt charge with national income,
19, 20; coinp&rigon of S3.tiQnaJ debt
charge with total government expendi-
ture, 19, 21; increases in national, 26-29;
changes in national, charges, 29-30;
debt histories of leading nations, 30-57;
summary of national, histories, 57-58;
war, 81-84; debt statements of various
States, 95-97; percentage of net, to as-
sessed valuation for all the States, 98,
99; changes in total of state, 1790-1913,
98-100, 101; reason for comparative
freedom of our States from, 100; impor-
tance of state history of, 100; debt his-
tories of all defaulting States, 100-128;
summary of state debt histories, 128-
129; provisions for debt-making in state
constitutions, 1 29-131; proportion of
net, to assessed valuation, 141; of coun-
ties and incorporated places, 141; of ten
largest cities in the United States, 141-
142; quasi-municipal debt-creating cor-
porations, 142-143; burden of, on local
communities, 142-143 ; constitutional
and statutory provisions in regard to
local, 143-152; comparison of Massa-
chusetts laws with those of other States
in regard to local, 146-152; position of
the legislature in regard to local, 146-
147; limitations on local, 147-148; ex-
ceptions in regard to creation of local,
147-148; limiting and removing tax
limit, 148; methods of paying local, 151;
incre^e in local, 1890, 1892, and 1913,
158-159; local, 1913, 159; local, in Great
Britain, France, and Germany, 159;
proportions between local, state, and
national, 159; relation of, to assets of
steam railroads, 163; ratio of, to assets
of public-service corporations, 203;
amount of plant and of quick assets of
industrial concerns compared with, 258.
Debt charges: comparison with national
incomes, 19-20; comparison with total
government expenditures, 19, 21;
changes in, 29-30.
Debt history: of leading nations, 30-57;
of France, 30-33; Great Britain, 34-39;
Austria-Himgary, 39-40; United States,
41-49; Russia, 49-51; Italy, 51-52;
Germany, 52-55; Japan, 55-57; sum-
mary of national, 57-58; government
loans in default, 58, 59; importance of
state, 100; of all defaulting States, 100-
1^8;, of Fennsylv9,nia, 103; Maryland,
314
INDEX
103-104; Indiana, 104-105; Illinois,
10S-106; Michigan, 106-107; Florida,
107-108; Mississippi, 108-109; Arkan-
sas, 109-110; Minnesota, iio-iii;
Texas, 111-112; California, 11 2-1 13;
Virginia, 114-117; West Virginia, 117-
118; North Carolina, 118-119; South
Carolina, 119-121; Georgia, 121-122;
Alabama, 122-124; Tennessee, 124-125;
Louisiana, 125-127; Missouri, 127-128;
of New York, i28;Ohio, i28;Massachu-
setts, 128; summary of state, 128-129.
Debtor nations, 65-70.
Default: collection of government bonds
in, 6; nations in default in 1874, 57;
loans of independent governments in,
between 1877 and 1912, 58, 59; collec-
tion of state bonds in, 94; three periods
of, of state bonds, 100-129; first period
of, of state bonds, 100, 102-110; second
period of, of state bonds, 100, 110-113;
third period of, of state bonds, loo-ioi;
113-128; means of recovery on county,
municipal, and district bonds in, 140;
causes of, in county, municipal, and dis-
trict bonds, 154-155; settlements made
with bondholders on defaulted county,
municipal, and district bonds, 155-156,
297-303; remedies for collection of rail-
road bonds in, 163; railroad bonds in,
165.
Depreciation: general rule for treatment
of, in estimating fair value, 224-225;
treatment of, under various circum-
stances, 225; summary of, question,
225-226; United States Supreme Court
on, 226.
District bonds: definition, 140; means of
recovery on defaulted, 140; factors gov-
erning safety of , 140-141, 152-153, 157;
laws in regard to issue of, in Massa-
chusetts, 143-146; comparison of Massa-
chusetts laws with those of other States
in regard to issue of, 146-152; purposes
of issue of, 148-150; issue of, for im-
proper or unwise purposes, 149-150;
length of time which bonds may run,
150-15 1 ; vote of people to authorize,
151; payment of, by sinking-fund or
serial method, 151; amount and char-
acter of population important factors in
safety of, 152-153; record of, 153-157;
causes of default in, 154-155; settle-
ments made with bondholders on de-
faulted, 155-156; legality of issue and
certification as to genuineness, 157-158;
safety of, 161.
District Courts, jurisdiction of, in enforce-
ment of the Federal Trade Conmiission
Law, 275.
Domestic commerce of the United States,
66.
Earnings: railroad, 169-170, 239; stability
of gross, of public-service corporations,
239; net, of public-service corporations,
240; net, of industrial concerns, 252-
256, 308-309.
Economic position, of nations, 64-65.
Ecuador, government loans in default, 59.
Electric Ught and power, origin and devel-
opment of, industry, 200-201.
Electric railways, origin and development
of, 199-200.
Elizabefi, New Jersey, default by, 154,
156, 297, 301.
England, early goverrmient borrowing in,
ix-x; development of, 10. See Great
Britain.
Equipment bonds, 162-163.
Expenditure: debt charge compared with
government, 19, 21; government, ne-
cessity for reduced, after the war, 85-86.
Failures: of railroads, 165-168; of public-
service corporations, 240-248; of indus-
trial concerns, 285-288.
Fair value of property, 219, 220, 222.
Federal licensing or incorporation of rail-
roads, 172-173; of industrial corpora-
tions, 283-284.
Federal Trade Commission: make-up of,
272; power of, to prevent unfair methods
of competition, 272-273; appeal to de-
cision of Circuit Court of Appeals from,
273; other powers and duties of the,
273-275; comparison of, with Inter-
state Commerce Commission, 276-277;
comparison of certain functions of,
with the action of a master in chancery,
277; general powers and functions of
the, 277-278; relation between the, and
the Department of Justice, 278; pub-
licity features, 278-279; policy of the,
as outlined by Chairman Davies, 279; in
a position to do constructive work, 279-
INDEX
3IS
280; precedents and analogies for the,
280; new Federal Trade Commission
Law substitutes regulation by, for regu-
lation by lawsuit, 280.
Federal Trade Commission Law: enact-
ment of the, 267-268, 272; leading pro-
visions of the, 272-275; publicity
features of the, 278-279; criticisms of
the, 281-282.
Financial stability depends on the people,
132, 139, 153-
First-mortgage bonds: definition of, 162;
remedies for non-payment of, 163.
Fixed charges: in railroad reorganizations,
186; in public-service reorganizations,
247-248; in industrial reorganizations,
290.
Florida, debt history of, 107-108.
Foreclosure price, in railroad reorganiza-
tions, 187, 192; relation between, and
value of railroad property, 187, 192; in
pubUc-service reorganizations, 241, 243,
246; in industrial reorganizations, 290.
Foreign commerce of leading nations, 66-
68.
Foreign or colonial investments: of Great
Britain, 65, 68-69, 7°j 88-8g, 90; of
France, 65, 70, 72, 88-89, 9°; of Ger-
many, 70; of the United States, 70-71.
Foreign remittances, 68, 69.
France: early government borrowing in,
ix; early local loans in, x; government
bonds of, s; prices of French rentes, 1913,
7; racial origin of, 9; outUne of history
of, lo-ii; population, wealth, and debt
of, 15-17; assets offsetting national debt
of, 18; national debt charge compared
with national income, 19, 20; national
debt charge compared with total gov-
ernment expenditure, 19, 21; growth
in population of, 21, 22, 23; growth in
wealth of, 24, 25, 26; increase in national
income of, 26; increase in debt of, 27, 29;
debt history of, 30-33; form of govern-
ment in, 60; character of population of,
63; military position of, 64; economic
position of, 65 ; foreign commerce of , 67,
68; foreign investments of, 65, 70, 72,
88-89, 9°) position of, among nations,
72; prices of French rentes, 74, 75, 76,
77; cost of present war to, 76, 78; total
losses of present war to July 31, 1915,
79; war loans put out since beginning of
present war up to October 23, 1915, 82,
83; war prices of French bonds, 91-92;
Anglo-French dollar loan, 88-91; state
operated railways in, 174, 176; regula-
tion of railways in, 177-178.
Franchises: description of public-service
corporation, 204; burdensome restric-
tions in public-service corporation, 204-
205; length of public-service corpora-
tion, 205; revocable licenses or indeter-
minate permits, 205; consent of local
authorities to installation of property,
205; difficulties in bringing about solu-
tion of franchise question, 205 ; best kind
of, 205-206; of Chicago City Railways
and Chicago Railways, 206; of Cleve-
land Railway, 206-207; interesting
franchise arrangements, 206-207; pub-
he-service corporation, said to exist to
enable bankers to sell bonds, 212; fran-
chise value, 228-229.
Freights, 68, 69, 70.
Funds: investment of, difficult, i; when
they should be invested, 1. See Sinking
funds.
Galveston, Texas, default by, 155, 299-
300, 301.
Gas industry, origin and development of,
199, 200.
General mortgage bonds: definition of,
162; remedies for non-payment of, 163.
Georgia, debt history of, 121-122.
Germany: government bonds of, 5; prices
of German bonds, 1913, 7; racial origin
of, 9; outline of history of, 11-12; pop-
ulation, wealth, and debt of, 15-17;
assets offsetting national debt of, 17-
18; national debt charge compared with
national income, 20; national debt
charge compared with total govern-
ment expenditure, 21; growth in popu-
lation of, 22, 23; growth in wealth of,
24, 25, 26; increase in national income
of, 26; increase in debt of, 27, 29; debt
history of, 52-55; form of government
in, 61-62; character of population of,
63; military position of, 64, 72; eco-
nomic position of, 65 ; foreign commerce
of, 67, 68; foreign investments of, 70;
position of, among nations, 72-73;
prices of Prussian consols, 1880-1912,
77; cost of present war to, 76, 78, 79;
3i6
INDEX
total losses of present war up to July 31,
igiS, 79; war loans put out since be-
ginning of present war up to October
23, 191S, 82, 83; war prices of German
bonds, 91, 92; state-operated railways
in, 174, 175-176; municipal ownership
and operation of public utilities in, 235,
236.
Going concern value, 227-228.
Government: early, loans, ix; early, bor-
rowing in France, England, and the
United States, ix-x; forms of, of leading
nations, 58, 60-63; commission form of,
IS7-
Government bonds: description of, 5; how
payable, 5; of United States, Great
Britain, France, and Germany, 5; spe-
cial security for some, 5-6; no method of
collecting defaulted, 6; can be issued for
any purpose, 6; prices of, 1913, 7; in de-
fault, 58, S9; prices of British consols
and French rentes, 74-75; prices of lead-
ing, 1873-1912, 74, 76, 77; proper at-
titude of American investors toward
foreign, 87-88; war prices of, 91-93;
summary of factors entering into values
and prices of, 93.
Government ownership of railroads: 173-
176; two forms of, 173; extent of, 174;
arguments in favor of, 174-175; argu-
ments against, 175; results of, 175-176.
Great Britain and Ireland: government
bonds of, 5; price of British consols,
1913, 7; racial origin of, 9; development
of, 10; population, wealth, and debt of,
15-17; assets offsetting national debt
of, 17; national debt charge compared
with national income, 20; national debt
charge compared with total government
expenditure, 21; growth in population
of, 20-21, 22, 23; growth in wealth of,
23, 25, 26; increase in national income
of, 26; increase in debt of, 27, 29; debt
history of, 34-39; form of government
in, 60; character of population of, 63;
military position of, 64; economic posi-
tion of, 65; foreign commerce of, 67, 68;
colonial and foreign investments of,
65, 68-69, 7°> 88-89, 90; position of,
among nations, 72 ; prices of British con-
sols, 74, 75, 76, 77; cost of present war
to, 76, 78; total losses of present war up
to July 31, 1915, 79; war loans put out
since beginning of war up to October 23,
1915, 81-82; war prices of British bonds,
91, 92; Anglo-French dollar loan, 88-
91; regulation of railways in, 177; muni-
cipal ownership and operation of public
utilities in, 235, 236.
Greece: special security for certain bonds
of, 6; government loans in default, 1877,
59-
Gross earnings: of railroads, 165, 239; of
pubUc-service corporations, 239.
Guatemala, government loans in default,
S9-
Historical development: United States,
10; Great Britain, 10; France, ro-ii;
Germany, 11-12; Italy, 12-13; Austria-
Hungary, 13; Russia, 13-14; Japan, 14-
15; bearing of, on credit, 15.
Holding companies: public service, 198;
industrial, 268-269, 270.
Honduras, government loans in default,
59-
Hudson River Electric Power Company,
reorganization of, 243, 245-246, 248.
Hungary. See Austria-Hungary.
lUinois, debt history of, 105-106; favor-
able factors affecting credit of, 137.
Income: national, jg, 20, 26; of railroads,
170.
Income bonds, 162.
Incorporation, federal: of railroads, 172-
173; of industrial concerns, 283-284.
Indiana: debt history of, 104-105; fran-
chises in, 205.
Industrial bonds: definition of, 251; de-
velopment of the issue of, 251-252;
most important factor in safety of, 256-
257; should be issued in serial form or
have sinking fund, 258; necessary to
consider each issue of, 292; examples of
strong, 292-293; prices of leading, 1914,
293-294; effect of European war on,294;
care required in selection of, for invest-
ment, 294.
Industrial concerns: origin and develop-
ment of, 251-252; fluctuating nature of
business done by, 252; net earnings of
some leading, 252-256, 308-309; com-
petitive nature of business done by, 256 ;
importance of good management of,
256-257; question as to whether com-
INDEX
317
petitive, should be bonded, 257; condi-
tions which may furnish proper basis
for bonding of, 257; plant and quick
assets compared with debt of, 258; rela-
tion of great, to the public, 258; com-
bination of, 258-259; origin of the
"trust" question, 259; large-scale opera-
tion and monopoly control by, 261, 284-
285; Sherman Anti-Trust Law, 262-
267; Clajfton Anti-Trust Law, 267-272;
suggestion of federal incorporation of,
283-284; failureof earnings tomeetesti-
mates, 285; various degrees of failure of,
285 ; leading business causes of failure of,
285; proportion between tangible assets
and total capitalization, 285; sources of
possible competition, 286; direct cause
of failure of many, 286; causes of failure
of certain large, 286, 287-288; bonding
of, 286-289; general conditions neces-
sary to success of, 289; reorganizations
of, 289-292; total capitalization in re-
organizations of, 289-290; fixed charges
in reorganizations of, 290; treatment of
bondholders in reorganizations of, 290;
table showing sacrifices made by bond-
holders in certain reorganizations of,
291; summary of reorganizations of, 292.
Interborough Rapid Transit Company
agreement, 207; made effective only
through public-service commission, 207.
Interest on foreign capital, 68, 69, 70, 90.
Interstate Commerce Commission: estab-
lishment of, 168; increase in powers of,
168-169; unable to handle problem of
railway regulation, 178; federal valua-
tion of all railroads under auspices of,
181 ; comparison of Federal Trade Com-
mission with the, 276-277.
Investment: in bonds a modem develop-
ment, be; of funds diflScult, 1; leading
channels of, i; three principal kinds of,
1; funds should be invested when re-
ceived, i; framework of bond, 3; muni-
cipal bonds among safest mediums of,
161; selection of industrial bonds for,
requires great care, 294.
Investments: colonial and foreign, of
Great Britain, 65, 68-69, 7°, 88-89, 90;
of France, 65, 70, 72, 88-89, 90; of Ger-
many, 70; of the United States, 70-71.
Invisible trade balance, 68-71; colonial
and foreign investments of nations, 68-
71; Interest, tourist expenditures, re-
mittances to friends, freights, 69;
American securities held abroad, 69-
70; lending countries, 70.
Issue of securities: conflict of authority in
approval of, by railroads, 170; federal
supervision of the, by railroads, 179-
180; authority of commissions to ap-
prove or disapprove, 230-232; in New
York State, 230-231; wisdom of com-
mission control of the, 231-232; pub-
licity method of control of the, 232.
Italy: price of Italian bonds, 1913, 7;
racial origin of, 9; outline of history of,
12-13; population, wealth, and debt of,
15-17; assets offsetting national debt
of, 18; national debt charge of, 20; na-
tional debt charge compared with total
government expenditure, 21; growth in
population of, 22, 23; growth in wealth
of, 24, 25; increase in debt of, 27, 29;
debt history of, 51-52; form of govern-
ment in, 60-61 ; military position of, 64;
economic position of, 65; foreign com-
merce of, 67, 68; position of, among na-
tions, 73; prices of Italian rentes, 77;
war loans put out by, since beginning of
present war up to October 23, 1915, 82,
83; war prices of Italian bonds, 91, 92;
state-operated railways in, 176; muni-
cipal ownership and operation of public
utilities in, 236.
Japan: special seciuity for certain bonds
of, 5; prices of Japanese bonds, 1913, 7;
racial origin of, 9; outline of history of,
14-15; population, wealth, and debt of,
15-17; assets offsetting national debt of,
18; national debt charge of, 20; national
debt charge compared with total gov-
ernment expenditure, 19, 21; growth in
population of, 23; increase in debt of,
27, 29; debt history of, 55-57; form of
government in, 62-63 j character of pop-
ulation of, 63; military position of, 64;
economic position of, 65; foreign com-
merce of, 67, 68; position of, among na-
tions, 73; prices of Japanese bonds
1903-1912, 77; war prices of Japanese
bonds, 91; state-operated railways in,
176.
Judicial review, of public-service com-
mission decisions, 232-233.
3i8
INDEX
Laws: constitutional, in regard to state
debts, 129-131; Massachusetts, in re-
gard to creation and payment of local
debt, 143-146; comparison of Massa-
chusetts, with those of other States in
regard to local debt, 146-152; Sherman
Anti-Trust Law, 262-267; Clasrton
Anti-Trust Law, 267-272; Federal
Trade Commission Law, 267-268, 272-
282; railroad, 305-307.
Legalty of issue: of state bonds, 131; of
municipal bonds, 157-158.
Length of time to run : of state bonds, 131;
of county, municipal, and district bonds,
150-151.
Liberia, government loans in default, 59.
Literacy: of nations, 63; by States, 135-
136.
Loaning credit: of States, 131 ; of counties,
mimicipaUties, and districts, 149-150.
Local debt: early, in France and the
United States, x; proportions between
county, dty and school district, 159; in
1913, 159; proportions between national,
state and, 159.
Los Angeles, local regulation of public-
service corporations in, 233.
Louisiana, debt history of, 125-127.
Market for bonds, 3.
Maryland, debt history of, 103-104.
Massachusetts: debt record of, 128; stat-
utory provisions in regard to local debt
in, 143-146; comparison of Massachu-
setts laws with those of other States in
regard to creation of local debt, 146-
152; limiting debt and removing tax
limit in, 148; purposes for which county,
municipal, and district bonds are issued
in, 144-146, 148-149; length of time
which municipal bonds may run in, 144-
146, 150; method of paying local debt
in, 151; street-railway, gas and electric-
light franchises in, 205; early state com-
missions in, 208; municipal ownership
and operation in, 234.
Memphis, Tennessee, defaults by, 155,
156, 297-298, 302.
Metropolitan Street Railway Company,
New York, reorganization of, 246-248.
Mexico: special security for certain bonds,
6; government loans in default, 58, 59.
Michigan, debt history of, 106-107,
Michigan Telephone Company, reorgani-
zation of, 241-242, 246, 248.
Middlesboro, Kentucky, default by, 154,
300, 302.
Military position of nations, 64.
Minnesota, debt history of, iio-iii; de-
cisions in, rate cases, 170-172.
Mismanagement of local finances, 157.
Mississippi, debt history of, 108-109.
Missouri, debt history of, 127-128.
Monopoly: recognition of, in cases of pub-
lic-service corporations, 202, 203-204,
209.
Monopoly control: combination and, 261;
competition and, 267; capitalization of,
267, 285, 287, 288; machinery for pre-
venting, 282-283; certain experiences
in, 284-285.
Mortgage: real-estate, 2; first, bonds, 162,
163; consolidated, bonds, 162; general,
bonds, 162.
Mxmidpal bonds: definition of, 140;
means of recovery on defaulted, 140;
certain factors governing safety of,i4o-
141, 152-153, 157; laws in regard to is-
sue of, in Massachusetts, 143-146; com-
parison of Massachusetts laws with
those of other States in regard to issue
of, 146-152; purposes of issue of, 144-
146, 148-149; issue of, for improper or
unwise purposes, 149-150; length of
time which bonds may run, 144-146,
150-151; vote of people to authorize,
151; payment of, by sinking fund or
serial method, 151; amount and char-
acter of population important factors
in safety of, 152-153; leading munici-
pal securities in the United States,
153; record of, 153-157; causes of
default in, 154-155, 297-303; cases of
bad faith with, 155; settlements made
with bondholders on defaulted, 155-
156, 297-303; mismanagement of local
finances, 157; commission form of gov-
ernment, 157; legality of issue and certi-
fication as to genuineness, 157-158; in-
crease in issue of, 158-159; increasing
issue of, to acquire pubUc utilities, 159;
prices of, 1902-1912, 160; war prices
of, 160-161; safety of, 161.
Municipal ownership and operation: possi-
ble municipal purchase of public utili-
ties, 159, 214-21S, 234; in Massachu-
INDEX
319
setts, 234; in other States, 234-235; in
Europe, 235-236; wisdom of, in the
United States, 236.
National income: compared with debt
charge, ig, 20; growth in, of leading
nations, 26.
Nations: no legal remedy against default-
ing, 6; can borrow for any purpose, 6;
racial origin of the leading modem, 9;
changes in leadership among, 9-10;
growth in population of, 20-23; growth
in wealth of, 23-26; growth in income of,
26; growth in debts of, 26-29; forms of
government of various, 58, 60-63; char-
acter of population of, 63 ; military posi-
tion of, 64; economic position of, 64-65;
trade position of, 66; foreign commerce
of, 66-68; invisible trade balance, 68-
71; lending, 70; situation of the leading,
71-73; reduced expenditures necessary
for national solvency, 85-86; status of,
after the war, 86-87.
Net earnings: of railroads, 169-170, 240;
of public-service corporations, 240; and
receiverships of railroads, gas and elec-
tric companies and industrials, 240; of
industrial concerns, 240; in 1903 and
1904, 253; 1907 and 1908, 254; 1913 and
1914, 255; of industrial concerns for
three periods, 308-309.
New Hampshire, statement by Public-
Service Commission, of proper treat-
ment of depreciation in estimating
value as a basis for rates, 225-226.
New York State: debt record of, 128;
favorable factors affecting credit of,
136-137; basis on which public-ser-
vice consolidations are permitted in,
214; regulation of issue of securities
of public-service corporations in, 230-
231.
North Carolina, debt history of, n8-
119.
Northern Pacific Railroad Company:
causes of failure of, 167; summary of
reorganization of, 187; what security-
holders received in reorganization of,
190; relation between foreclosure price
and debt of, 187, 192; market value of
new securities received in reorganiza-
tion of, 193.
Notes, short term, 163.
Ohio, debt record of, 128.
Operation: possible government, of rail-
roads in the United States, 173-175; re-
sults of state, of railways in Europe,
175-176; municipal, of public-service
corporations in Massachusetts, 234;
municipal ownership and, of public-
service corporations elsewhere in the
United States, 234-235; municipal
ownership and, of pubHc-service cor-
porations in Europe, 235-236; munici-
pal, of public utilities and govern-
ment, of railroads, 236; possible ad-
vantages and disadvantages of large-
scale, of industrial concerns, 259-261;
successful and unsuccessful large-scale,
of industrial concerns, 261; certain ex-
periences in large-scale, 284-285.
Original cost method in estimating value
as a basis for rates, 220.
Overhead charges, allowance for, in esti-
mating value as a basis for rates, 226-
227.
Ownership: government, of railroads, 173-
17s; two forms of government, of rail-
roads, 173; extent of government, of
railroads, 174; arguments in favor of
government, of railroads, 174-175; ar-
guments against government, 175; re-
sults of state operation in Europe, 175-
176; regulation vs. government, 177;
municipal, of public-service corpora-
tions in Massachusetts, 234; municipal,
of pubUc-service corporations elsewhere
in the United States, 234-235; mimici-
pal, of pubUc-service corporations in
Europe, 235-236; municipal, of public
utihties more feasible but less necessary
than government ownership of raihoads,
236; govenmient, of telephone lines,
237-238; government, of water-power
developments, 238.
Paraguay, government loans in default.
Peace, possible basis of, 84-85.
Pennsylvania, debt history of, 103.
Peru, government loans in default, 59.
Pittsburg, Pennsylvania, defaults by, 154,
156, 298-299, 302.
"Plain" bonds, 162.
Population: of leading nations, 15-16;
growth in, of leading nations, 20-23;
320
INDEX
character of, important in estiffiating
national credit, 63 ; amount and increase
of, by States, 1900-1910, 132, 133;
color of, by States, 1900-1910, 132, 134;
literacy of, in the United States, 13s,
136; an important consideration in
safety of local debt, 152-153; amoimt
and character of, important factors in
estimating safety of public-service cor-
poration bonds, 202-203.
Prices: of government bonds, 7, 74-76, 77,
91-93; of state bonds, 137-139; of muni-
cipal bonds, 160-161; of railroad bonds,
196; of public-service corporation
bonds, 198-199, 250; of industrial bonds,
293-294.
Promotions: corporate, and reorganiza-
tions, 284; purposes of industrial, and
consolidations, 284.
Public: relation of railroads to the, 169-
170; relation of public-service corpora-
tions to the, 204, 238-239; relation of
telephone companies to the, 237-238;
relation of water-power developments
to the, 238; relation of industrial con-
cerns to the, 258; corporations subject
to control of the, 262.
Public properties: value of state, 98; value
of local, 158.
Public-service commissions: regulation of
railroads by State, 169; establishment
of early, 208; establishment of modem,
208; present, having jurisdiction over
street railway, gas, electric light and
power and telephone companies, 210-
212.
Public-service corporations : issue of muni-
cipal bonds to acquire public utilities,
149, 159; origin and development of
business done by, 199-202; points of
similarity in different classes of, 202;
monopolistic character of, 203-204;
franchises of, 204-207; regulation by
state commissions of, 207-208; present
state commissions having jurisdiction
over, 209, 210-212; leading principles of
state regulation of, 209, 213-232; recog-
nition of monopoly principle, 209; cer-
tificates of pubUc convenience and ne-
cessity, 2og, 212-213; consolidations of ,
213-214; possible municipal purchase
of, 214-215; valuation of, as a basis for
rates, 220-230; state vs. local regulation
of, tsS't Uniform Utilities Bill, 233;
mimidpal ownership of, 234-236; bread
relation of, to the people, 238-239;
stability of gross earnings of, 239; net
earnings and receiverships of, 240; re-
ceiverships and reorg^iizatlons of, 240-
248; summary of situation of, 248; finan-
cial plan of, should be broad, flexible,
and firm, 249-250.
Public-service corporation bonds: princi-
pal classes of, 198; prices of some lead-
ing, 198-199; size and character of com-
munity served an important factor in
safety of, 202-203; ratio of debt to as-
sets of, 203; how regulation by state
commissions affects safety of, 208; ex-
amples of strong, 248-249; prices of,
250; war prices of, 250; final test of, 250.
Purpose of issue: of government bonds, 6;
of state bonds, 94, 129-131; should be
of a strictly public character, 129, 148-
149; of county, municipal, and district
bonds, 144-149; unwise or improper
purposes, 149-150.
Quasi-municipal corporations, 142.
Racial origin of leading modem nations, 9.
Railroad bonds: definition of, 162; various
kinds of, 162; payable from property or
earnings, 163; certain factors governing
safety of, 163, 195; remedies for non-
payment of, 163; a popular mediima of
investment, 164; conditions to be con-
sidered before investing in, 164-165; de-
faults on, 165 ; examples of strong, 195-
196; prices of, 196; war prices of, 196.
Railroads: beginning and growth of, 164;
growth in mileage of, 164, 166; competi-
tion of, 165, 256; gross income of, 165,
239; subject to conflicting regulation,
165; cost of financing and operating,
165; receiverships and reorganizations
of, 165-166; leading causes of railroad
troubles, 166; difficulties of, since 1893-
98, 166, 168; failmes of various, 166,
167; summary of causes of railroad
troubles, 168; establishment of Inter-
state Commerce Commission, 168; in-
crease in powers of the commission,
168-169; regulation of, by state legisla-
tures and public-service commissions,
168-169; relation of, to the public,
INDEX
^n
169-170; arbitration of wages on, 170;
Regulation by States of issues of securi-
ties, 170; possible exclusive control of,
by Federal Government, 170; Minne-
sota rate cases, 170-172; Shreveport
rate cases, 172; comparison of Minne-
sota and Shreveport cases, 172; federal
licensing or incorporation of interstate,
i72-i73;govemment ownership of, 173-
17s; government ownership and opera-
tion of, in Europe, 17-18, 175-176;
regulation of, 177-180; regulation of, in
Great Britain and Ireland, 177; regula-
tion of, in France, 177-178; regulation
of, in Europe, 178; outline for exclusive
federal regulation of all, in the United
States, 178-180; supervision of securi-
ties of, 179-180, 232; regulation of, rates,
179-181 ; rates should be reasonable and
compensatory, 180; bases of rate-mak-
ing, 180; limits of high and low railroad
rates and ideal rate, 180-181; federal
valuation of, 181-183; valuations of,
made by certain States, 183, 184; possi-
ble result of federal valuation of, 183;
suggested railroad reforms, 183, 185;
objects of proper regulation of, 185 ; two
periods of reorganizations of, 185-186;
reorganization of Atchison, Topeka &
Santa F6 Railroad Company, 187, 188,
193; Union Pacific Railway Company,
187, 189, 193; Northern Pacific Rail-
road Company, 187, 190, 192, 193;
Baltimore & Ohio Railroad Company,
187, 191, 193; relation between fore-
closure price and value of property, 187,
192; rights of minority bondholders
in foreclosure, 192; capitalization of
American and European, compared,
194; passenger rates of American and
European, compared, 194-195; freight
rates of American and European, com-
pared, 194-195; comparison of efficiency
of American and European, 194-195;
magnitude of railroad industry, 196-
197; gross and net capitalization of all,
197; importance of service performed
by American, 197; should be subject
to federal regulation, 197; laws, 305-
307-
Railways, origin and development of
street and electric, 199-200.
Rate-making: bases of railroad, in the
United States, 180; principles of, for
public-service corporations, 218.
Rates : regulation of railroad, 1 79-181 ; rail-
road, should be reasonable and compen-
satory, 180; bases of railroad rate-mak-
ing, 180; limits of high and low railroad,
and ideal rate, 180-181; comparison of
American and European passenger, 194-
19s; comparison of American and Eu-
ropean freight, 194-195; railroads are
entitled to fair, 197; regulation of pub-
lic-service corporation, by state commis-
sions, 215; interrelationship of service
and, of public-service corporations, 217;
authority of commissions over, of pub-
lic-service corporations, 218; bases of,
for public-service corporations, 218-
219; fair return on fair value of prop-
erty, 219; rate of retittn for public-ser-
vice corporations, 219; variable rate of
return, 219; valuation of public-service
corporations as a basis for, 220-230;
summary of valuation as a basis for,
229-230.
Real estate: advantages and disadvan-
tages of, as an investment, 2; mort-
gages, 2.
Receiverships: railroad, 165-168, 240;
public-service, 240; industrial. 240; net
earnings and, of railroads, gas and elec-
tric companies and industrials, 240.
Reforms, suggested railroad, 183, 185.
Refunding bonds, 150.
Regulation: railroad, by Interstate Com-
merce Commission, 168-169; railroad,
by state legislatures and public-service
commissions, 169; state, of issues of new
railroad securities, 170; of American rail-
roads by Federal Government alone,
170; govemmehtownership w., 177; rail-
way, in Great Britain and Ireland, 177;
of railways in France, 177-178; of rail-
ways in Europe, 178; outline for exclu-
sive federal, of all interstate railroads,
178-180; of railroad rates, 179-181; rail-
roads should be subject to federal, r97;
of public-service corporations by state
commissions, 207-208; leading princi-
ples of state, of public-service corpora-
tions, 209, 213-232; principal sources of
material used in discussing state, of
public-service corporations, 209; of rates
and service by state commissions, 215;
322
INDEX
of service, 213-217; of rates, 218-230;
fair return on fair value of property,
219; rate of return, 219; fair value of
property, 220; of capitalization of pub-
lic-service corporations by state com-
missions, 230-232; supervision of ac-
coiuits and ordering of reports of public-
service corporations, 232; state w. local,
of public-service corporations, 233; of
telephone lines by Federal Govenmient,
237-238; of water-power companies,
238.
Reorganizations: railroad, 185-194; two
periods of raflroad, 185-186; general
summary of two periods of railroad, 186;
assessments in railroad, 186, 188-191;
earlier railroad, less effective than later,
186; Atchison, Topeka & Santa F6 Rail-
road, 187, 188, 1Q3; Union Pacific Rail-
way, 187, 189, 193; Northern Padfic
Railroad, 187, 190, 192, 193; Baltimore
& Ohio Railroad, 187, 191, 193; factors
determining apportionment of new se-
curities in railroad, 192 ; market value of
securities received in certain railroad,
192-194; public-service, 240-248; Mich-
igan Telephone Company, 241-242, 246,
248; Chicago Union Traction Company,
24r, 243, 244, 246, 248; Hudson River
Electric Power Company, 243, 245, 246,
248 ; Metropolitan Street-Railway Com-
pany, 246-248; summary of four pubhc-
service, 246, 248; corporate promotions
and, 284; industrial, 289-292; aim of in-
dustrial, 289; total capitalization in rail-
road, 289-290; total capitalization in
industrial, 289-290; fixed charges in in-
dustrial, 290; treatment of bondholders
in industrial, 290; sacrifices made by
bondholders in certain industrial, 290-
292; sumtmary of industrial, 292.
Replacement, cost of, theory, 220.
Reports: ordering of, of public-service cor-
porations by state commissions, 232;
may be asked by Federal Trade Com-
mission, 274, 277.
Reproduction new, cost of, theory, 220.
Repudiation, attitude of the people to-
ward, 128-129, 156.
Russia: prices of Russian bonds, 1913, 7;
racial origin of, 9; outline of history of,
13-14; population, wealth, and debt of,
15-1 7 ; assets offsetting national debt of.
18; national debt charge compared with
national income, 20; national debt
charge compared with total government
expenditure, 21; growth in population
of, 22, 23; growth in wealth of, 25; in-
crease in debt of, 27, 29; debt history
of, 49-sr; form of govenmient in, 62;
character of population of , 63; military
position of, 64; economic position of,
65; foreign commerce of, 67, 68; posi-
tion of, among nations, 73; prices of
Russian bonds, 1873-1912, 77; cost of
present war to, 76, 78; total losses of
present war up to July 31, 1915, 79;
war loans put out since beginning of
present war up to October 23, 1915,
82, 83: war prices of Russian govern-
ment bonds, 91, 92.
St. Clair County, Missouri, default by,
IS4, 156, 299, 302.
Santo Domingo, government loans in de-
fault, 59.
Securities: American, held abroad, 69-70,
90; of colonial and foreign countries
held by Great Britain, 65, 68-69, 70,
88-89, 9°; foreign and colonial, held by
France, 65, 70, 72, 88, 89, 90; foreign
and colonial, held by Germany, 70;
foreign, held in the United States, 70-
71; supervision of railroad, 179-180;
approval of public-service, 230-232;
wisdom of commission control of the
issue of public-service, 231-232; pub-
licity method of control of issue of, 232.
Service: regulation of, by state commis-
sions, 215; three leading elements of,
215; safety of, 215-216; extent of, 216;
joint use of facilities by public-service
corporations, 216; character of, 216-
217; other principles in regulation of,
217; regulation of, should be efficient
and flexible, 217; interrelationship of,
and rates, 217; cost of, as a basis for
rates, 218-219.
Sherman Anti-Trust Law: enactment 6f,
262-263; leading provisions of the, 263;
enforcement of the, 263; early interpre-
tation by the United States Supreme
Court of the, 264-265; early interpreta-
tion a departure from common law,
264-265; later interpretation by the
Supreme Court of the, in the Standard
INDEX
323
Oil and American Tobacco cases, 265-
267; grounds of decisions in Standard
Oil and Tobacco cases, 265-266; evi-
dence on which decisions were based,
266; decisions in Standard Oil and To-
bacco cases brought to a workable
basis, 266-267; in regard to exports,
270.
Short-term notes, 163.
Short-term paper, i.
Shreveport rate cases, decisions in, 172.
Sinking fimds: national, of France, 31, 32;
national, of Great Britain, 34, 33, 37,
38; national, of the United States, 44,
46; of Russia, so; of Germany, ss', of
Japan, 56; municipal, 151; industrial,
258.
South Carolina, debt history of, 119-121.
Special assessment bonds, 140.
State bonds: description of, 94; purpose of
issue of, 94, 129-131; collection of de-
faiilted, 04; factors determining safety
of, 94-95, 137; certification of, 131;
vote of people to authorize, 131; length
of time to run, 131; examples of general
considerations governing safety of, 136-
137; prices of, 1872-1912, 137-138; war
prices of, 138-139; most important fac-
tor determining safety of, 139.
States: early borrowing by our, x; debt
statements of various, 95-97; percent-
age of net debt to assessed valuation for
all, 98, 99; changes in total debts of all,
98-100, loi ; debt histories of all default-
ing, 100-128; constitutional restrictions
on debt making of, 129-131; amount
and increase of population by, 132-133;
population by color by, 132, 134; liter-
acy by, 135-136; regulation by, of is-
sues of new railroad securities, 170.
Statutory limitations in regard to creation
and payment of local debt, 143-152.
Stocks: as a channel of investment, i; na-
ture of, 2; classes of, 2.
Supreme Court of the United States: on
valuation as a basis for rates, 221-222,
223, 224, 226; on valuing land, 223; on
pavement over mains, 224; on depreda-
tion, 226; interpretation of the Sherman
Anti-Trust Law by the, 264-267, 272;
appeal to the, in enforcement of Clayton
Act, 272; in enforcement of Federal
Trade Commission Act, 273. _ ^,
Tax limits, 148.
Telephone: origin and development of the,
industry, 201-202; relation of, com-
panies to the public, 237-238; report of
Postmaster-General of the United
States on telegraph and telephone lines,
237; ownership or regulation by Federal
Government of, lines, 237-238.
Tennessee, debt history of, 124-125.
Terminal bonds, 163.
Texas, debt history of, 111-112; favorable
factors affecting credit of, 137.
Tourist expenditures, 68, 69, 70, 88.
Trade position of nations, 66^71.
Trust legislation: Sherman Anti-Trust
Law, 262-267; Clayton Anti-Trust Law,
267-272; Federal Trade Commission
Law, 267-268, 272-282; existing anti-,
283.
"Trust question": origin and develop-
ment of the, 258-259; true solution of,
282.
Turkey, government loans in default, 59.
Uniform Utilities Bill, 233.
Union Pacific Railway Company: cause of
failure of, 167; relation between fore-
closure price and debt, 187; summary of
reorganization of, 187; what security-
holders received in reorganization of,
189; market value of new securities re-
ceived in reorganization of, 193.
United States: early government borrow-
ing in the, x; early state and local loans
in the, x; development of the bond busi-
ness in the, x; government bonds of
the, 5; prices of bonds of the, 1913, 7;
racial origin of the, 9; development of
the, 10; population, wealth, and debt of
the, 15-17; assets offsetting national
debt of the, 17; national debt charge
compared with national income, 19, 20;
national debt charge compared with
total government expenditure, 19, 21;
growth in population of the, 22, 23;
growth in wealth of the, 24, 25, 26; in-
crease in national income of the, 26; in-
crease in debt of the, 27, 29; debt history
of the, 41-49 ; form of government in the,
58, 60; character of population of the,
63; military position of the, 64; eco-
nomic position of the, 65; domestic com-
merce of the, 66; foreign commerce of
324
INDEX
the, 67, 68; payments by the, to settle
foreign trade, 69; American securities
held abroad, 69-70, 90J foreign invest-
ments of the, 70-71; position of the,
among nations, 71; prices of bonds, 76,
77; war prices of bonds, 93.
Uruguay, government loans in default,
59-
Valiiation: assessed, for all States, 1912-
1913, 98, 99; relation between true
value of property and assessed, 98; as-
sessed, of coimties and incorporated
places, 141; assessed, and net debt of
local communities, 141; federal, of rail-
roads, 181-183; factors to be considered
in federal, of railways, i8i; not conclu-
sive in making rates, 182; benefits to
be derived from, of railroads according
to Mr. Prouty, 182; summary of rail-
way, 182-183; railroad, made by certain
States, 183, 184; possible result of fed-
eral, 183; of public-service corporations
as a basis for rates, 220-230; leading
theories of, as a basis for rates, 220;
original cost theory, 220; cost of repro-
duction theory, 220; cost of replace-
ment theory, 220; best modem practice
favors considering all elements in de-
termining fair value as a basis for rates,
221-222; United States Supreme Court
on, as a basis for rates, 221-222;
methods of treatment of certain de-
tails of, 222-223; land, 223; United
States Supreme Court on valuing land,
223; present vs. unit prices, 223-224;
pavement over mains, 224; United
States Supreme Court on pavement
over mains, 224; treatment of depreda-
tion, 224-226; United States Supreme
Court on depredation, 226; overhead
charges, 226-227; development expense
or going concern value, 227-228; good-
will, 227; franchise value, 228-229; sum-
mary of, as a basis for rates, 229-230.
Value: fair, of property, 219, 220; allow-
ance for overhead charges in estimating,
226-227; going concern, or develop-
ment expense, 227-328; franchise, 228-
229.
Venezuela, government loans in default,
S9-
Virginia, debt history of, 1 14-1 17.
Vote of people: to authorize state bonds,
131; to authorize county, mimidpal,
and district bonds, 151.
Voting trusts, 192.
War: estimated direct cost of present war,
76-77, 78-79, 80-81; comparison with
cost of previous wars, 80; total losses of
present, to date, 79-80, 81; loans, 81-
84; possible basis of peace, 84-85; ne-
cessity of reduced expenditures, 85-86;
status of nations after the, 86-87.
War prices: of government bonds, 91-93;
state bonds, 138-139; munidpal bonds,
160-161; railroad bonds, 196; public-
service corporation bonds, 250; indus-
trial bonds, 294.
Water companies, 198.
Water-power developments, relation of, to
the public, 238.
Wealth: estiinated,of leading nations, 15-
17; growth in, of leading nations, 23-26.
West Virginia, debt history of, 11 7-1 18.
Wisconsin: franchises in, 205; basis on
which public-service consolidations are
permitted in, 214; regulation of service
by. Commission, 215; Commission on
determining fair value as a basis for
rates, 221; amount allowed by. Commis-
sion for overhead charges in estimating
iaii value, 227.
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